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VIG vs. VYM – Comparing Vanguard’s 2 Popular Dividend ETFs

Last Updated: December 12, 2020 8 Comments – 4 min. read

Financially reviewed by Patrick Flood, CFA.

Two of the most popular dividend-oriented ETF’s are the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (VYM). Let’s compare them.

To be clear, I don’t obsess over dividends. But it’s impossible to avoid seeing and hearing about dividend investors’ preferences of dividend-focused ETF’s. Dividend investors seem to use these two funds interchangeably, perhaps not realizing they are two fundamentally different things. Here we’ll review these ETFs and explore the nuances between them.

Prefer video? Watch it here.

In a hurry? Here are the highlights:

  • VIG and VYM are two popular dividend-oriented ETF’s from Vanguard.
  • VIG is comprised of dividend growth stocks – companies with a historically increasing dividend of at least 10 consecutive years, excluding REITs.
  • VYM is comprised of higher-than-average-dividend-yield stocks, excluding REITs.
  • Since their inception in 2006, VIG has handily beaten VYM on every notable metric.
  • VYM has underperformed the S&P 500 index historically.
  • Vanguard themselves concluded that the performance of the stocks within VIG and VYM was fully explained by their exposure to the known equity factors of Value, Quality, and Low Volatility.

Contents

  • VIG vs. VYM – Methodology
  • VIG vs. DGRO
  • SCHD vs. VYM
  • VIG vs. VYM – Composition
  • VIG vs. VYM – Performance Backtest

VIG vs. VYM – Methodology

As the name implies, the Vanguard Dividend Appreciation ETF (VIG) is comprised of dividend growth stocks – companies with a history of an increasing dividend over time. Specifically, VIG tracks the NASDAQ US Dividend Achievers Select Index, formerly known as the Dividend Achievers Select Index. This index was created in 2006, and is comprised of companies with at least 10 consecutive years of an increasing dividend payment.

The Vanguard High Dividend Yield ETF (VYM) seeks to track the FTSE® High Dividend Yield Index. Constituent stocks are selected from the FTSE® All-World Index, excluding REITs, and ranked by forecasted dividend yield.

VIG vs. DGRO

While we’re at it, we can compare Vanguard’s VIG to the iShares Core Dividend Growth ETF (DGRO). They are very similar. The only real difference is that VIG has a dividend growth requirement of 10 consecutive years, while DGRO requires only 5 consecutive years.

As such, we would expect DGRO to be slightly more volatile than VIG, and indeed it has been since inception:

vig vs dgro performance backtest
Source: PortfolioVisualizer.com

Specifically, at the time of writing, VIG has more exposure to the Quality/Profitability and Investment factors, and DGRO has slightly more exposure to market beta:

vig vs dgro factor exposure
Source: PortfolioVisualizer.com

SCHD vs. VYM

Another popular comparison is SCHD and VYM. SCHD is the Schwab U.S. Dividend Equity ETF. It tracks the Dow Jones U.S. Dividend 100™ Index. This index is comprised of 100 stocks with at least 10 consecutive years of dividend payments and a minimum market cap of $500 million. Stocks are then selected for the index by screening for high yield, profitability metrics, and 5-year dividend growth. SCHD is similar to DGRO in that regard.

As we might expect based on this selection methodology, compared to both VYM and VIG, SCHD has more loading on the Profitability factor but less loading on the Size and Value factors:

schd vym factor loading
Source: PortfolioVisualizer.com

SCHD has more exposure to large-cap stocks and less exposure to small- and mid-cap stocks. Because of this, I’d be more likely to use VIG and/or VYM over SCHD.

VIG vs. VYM – Composition

VIGVYM
Basic Materials3.40%3.30%
Consumer Goods11.50%15.00%
Consumer Services20.00%9.10%
Financials10.80%15.80%
Healthcare12.60%16.20%
Industrials25.00%8.40%
Oil & Gas0.00%5.50%
Technology10.10%11.20%
Telecommmunications0.00%5.50%
Utilities6.60%10.00%

Notice VYM’s larger weighting to Consumer Goods, Financials, Telecom, and Utilities. These are sectors notorious for relatively high dividend yields, but not necessarily a growing dividend over long time periods.

VIG vs. VYM – Performance Backtest

Typical of Vanguard funds, both VIG and VYM have sufficient AUM and trading volume and low expense ratios; I’m ignoring those quick facts on these since they’re largely similar. Yield chasers will of course note that VYM – being focused on high yield per se – has a considerably higher dividend yield than VIG. I would encourage you to ignore that fact and instead focus on the fundamental mechanics and historical performance:

vig vs vym performance backtest
Source: PortfolioVisualizer.com

In short, VIG has handily beaten VYM on every metric since inception – higher return, lower volatility, smaller drawdowns, and considerably higher risk-adjusted return (Sharpe). Over that same time period, VYM also underperformed an S&P 500 index.

Of course, when you stop and think about the underlying fundamentals, we should probably expect VIG to beat VYM – dividend growth companies tend to be more stable and less volatile, and have strong profitability. Specifically, VIG has more loading on the Quality/Profitability factor than VYM. Simultaneously, we know that in some cases, a high dividend yield can actually be a signal of an unstable company. In fairness, VYM also has comparatively more loading on Value than VIG, and the Value factor suffered over the backtested time period. In short, it’s likely wise to just utilize both VIG and VYM (and VIGI and VYMI for international), as they are two different funds. I created a dividend-focused portfolio that incorporates both of these funds that can be found here.

But here’s the kicker. Vanguard themselves investigated the strategies contained in VYM and VIG and concluded that their constituent stocks’ performance was fully explained by their exposure to the known equity factors of Value, Quality, and Low Volatility, so you may be better off simply investing in products that specifically target those factors.

Do you hold any of these ETFs in your portfolio? Let me know in the comments.


Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.

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About John Williamson

Analytical and entrepreneurial-minded data nerd, usability enthusiast, Boglehead, and Oxford comma advocate. I lead the Paid Search marketing efforts at Gild Group. I'm not a big fan of social media, but you can find me on LinkedIn and Reddit.

Reader Interactions

Comments

  1. Steve Paul says

    January 11, 2021 at 9:45 am

    I hold both VIG and VYM, roughly 70/30% split. I am looking for ways to reduce my exposure to FAANG going into 2021.

    Reply
    • John Williamson says

      January 11, 2021 at 10:20 pm

      Tilting toward Value would definitely reduce that exposure. I use a dash of Utilities to specifically diversify away from tech, since I work in tech and the market is already over 1/4 tech.

      Reply
  2. Tom says

    January 8, 2021 at 2:44 am

    This was very useful. Love your site and work!

    I am currently constructing an in-retirement (i.e. decumulation stage) portfolio and VIG will be a big component. VIG is recommended in all of Morningstar’s Model ETF portfolios.

    The big appeal to me is that VIG has the lowest volatility of all the large blend domestic equity ETFs. I am now debating shifting some of my VIG allocation to VYM (I was hesitant before I read this article).

    The trend toward value and cyclicals seems to be picking up speed as we as we head into 2021 with an economic rebound expected (VYM is beating VIG on trailing 1-mo, 3-mo and YTD).

    I am also looking at VTIP, another Morningstar recommended holding, for a chunk of my bond holdings. VTIP is already making moves and is one of the few bond ETFs with a YTD gain so far. With the 10-year yield rising, the long duration bond ETFs are suffering, but eventually I am going to allocate a big portion to AGG.

    My overall portfolio will be 50/50 stocks/bonds split across taxable and trad-IRA accounts. It gets complicated when constructing a multi-account portfolio that you know will be drawn down and down the road you will have glidepath considerations, and taxable income sources like social security and IRA RMDs kicking in.

    Reply
    • John Williamson says

      January 11, 2021 at 10:19 pm

      Thanks Tom!

      Reply
  3. Sanjay says

    December 28, 2020 at 1:29 pm

    Excellent Article John. I own both VIG and VYM. Your article makes it Ver easy for anyone to understand the fundamental difference between the two ETFs.

    Reply
    • John Williamson says

      December 28, 2020 at 1:37 pm

      Thanks for the kind words, Sanjay! Glad you found it helpful!

      Reply
  4. Bert Stanley says

    November 29, 2020 at 2:36 pm

    Great work and very helpful as I try to generate income while navigating a very uncertain future

    Reply
    • John Williamson says

      November 29, 2020 at 2:39 pm

      Thanks Bert! Glad you found it helpful!

      Reply

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