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Vanguard Dividend Appreciation ETF (VIG) Has Turned Into One Of The Worst Dividend ETFs Of 2022

VIG ranks as the 5th worst performing U.S. dividend ETF year-to-date and it's likely tech stocks that are causing it.

The Vanguard Dividend Appreciation ETF (VIG) is and remains one of the most popular dividend ETFs out there for investors. It's simple and straightforward approach to investing in dividend growth stocks has attracted investor interest and money with average annual returns of nearly 10% since its 2006 inception.

2022, however, has been a completely different story.

It's strange too because the dividend investing theme has actually been one of the market's best performers over the past year. Its 15% return has essentially matched that of the large-cap category, but has outperformed the U.S. total market ETF average by roughly 3%. So this shouldn't simply be an issue of the style underperforming.

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Within the dividend ETF universe, it's another story. While it's true that dividend growth has underperformed high yield by about 1% year-to-date, it doesn't explain how VIG is underperforming the mark so drastically. After applying some standard liquidity and tradability screens, VIG essentially just targets stocks with 10+ consecutive years of dividend growth. The objective isn't complicated (although it does scrub out the highest yielders and REITs, so there may be some contributing factor there), but speaks more to how the style itself is comparatively out of favor at the moment.

Let's look at the returns.

There are more than 140 ETFs in the marketplace that utilize some type of dividend-focused investing strategy. International stocks are performing miserably at the moment and we know that most U.S. dividend ETFs are going to outperform those target international or even global stocks this year. For more of an apples to apples comparison, we'll just look at U.S. dividend ETFs.

That universe consists of 74 dividend ETFs. Of that group, VIG ranks as the 5th worst performing ETF year-to-date with a loss of more than 7%.

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The four ETFs above VIG on this list offer a mixture of target markets and styles, so I don't think there's any definitive trend to be found here. The presence of the ProShares S&P Technology Dividend Aristocrats ETF (TDV), which uses a similar methodology for the single sector target, shouldn't be surprising given how much growth has underperformed this year.

If you compare VIG to some of the other largest dividend ETFs out there, you can see a definite trend of dividend growth strategies underperforming. Some are even doing quite well.

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Three ETFs that target high yielders - the iShares Core High Dividend ETF (HDV), the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) and the iShares Select Dividend ETF (DVY) - are all up between 2% and 5% year-to-date in a year when the S&P 500 is down 10%. More conservative dividend strategies have lagged for a while as mega-cap growth and tech have dominated the landscape, so it's nice to see some of these funds having their moment in the sun again.

VIG, however, is the outlier. Its closest comp in this group is probably the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which targets stocks with 25+ years of consecutive dividend growth instead of the 10-year requirement for VIG. Perhaps the biggest performance delineator for VIG compared to some of these other funds is its technology weight. VIG has about 20% of the portfolio dedicated to tech stocks versus just a 3% allocation for NOBL.

Conclusion

I don't think this is necessarily the time to abandon VIG in your portfolio, but it is a time to be aware of what's in it. The fund has no doubt benefited from the overweight in tech over the past few years, but is being punished by it today. In many cases, I imagine investors haven't been bothered by VIG's tech weighting. In fact, I'd guess that most preferred it.

But times have changed. Rising rates due to the impending launch of the Fed's new monetary tightening cycle is deflating some of the air out of growth stock valuations and likely impacting VIG in the process.

Short-term investors might want to think twice about how the tech allocation will affect their portfolio decisions, but longer-term investors probably don't need to worry much.

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