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Vanguard Dividend Appreciation ETF (VIG) About To Get A New Look

The $60 billion dividend growth ETF will be changing indexes in the 3rd quarter.

The Vanguard Dividend Appreciation ETF (VIG), the largest dividend-focused ETF in the marketplace and 19th largest ETF overall with assets of nearly $60 billion, is scheduled to change its underlying index in the 3rd quarter of 2021.

VIG will be moving from the NASDAQ U.S. Dividend Achievers Select Index to the S&P U.S. Dividend Growers Index.

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In the statement announcing the change, Vanguard explained its reasoning.

"As part of our ongoing due diligence process, Vanguard determined that new benchmarks would best enable our Dividend Appreciation funds to perform in line with their investment objectives," said Kaitlyn Caughlin, head of Vanguard Portfolio Review Department. "We believe S&P Dow Jones Indices' approach to dividend indexing closely aligns with Vanguard's views, and we are confident that S&P DJI is well-positioned to administer the indexes moving forward."

Before you get worried, there won't be any major changes between the selection criteria for the two indexes. In fact, there may not even be any noticeable differences. The two indexes are very similar, but there are a few differences that will alter the underlying composition of the "new" VIG.

Screen Shot 2021-06-29 at 12.04.08 PM

The core selection criteria that only considers companies with a 10+ year dividend growth streak remains unchanged. The wording on the liquidity requirement is slightly different, but the net effect is practically negligible.

There are a couple of modest differences. The screen for the new index that removes the highest yielding potential components is used by a handful of other ETFs and makes sense. Even though they've got historical dividend growth streaks could indicate a couple of things: a recent share price decline that has pushed the yield artificially high or it could be a precursor to a potential dividend cut. That may or may not actually happen, but the removal of these names also removes a degree of risk from the portfolio.

It's also worth noting that limited partnerships are excluded from the original index, but they're not necessarily ruled out from the new one. There are some partnerships that show up on the dividend aristocrats list, such as Brookfield Infrastructure Partners (BIP) and Enterprise Products Partners (EPD), but I suspect the high yield screen is what knocks these names out. Currently, the new index includes no allocation to the energy sector.

Screen Shot 2021-06-29 at 12.04.22 PM

No real change in the weighting methodology. The float-adjusted market cap vs. market cap difference eliminates corporate closely-held shares from consideration in market cap calculations, but don't expect any big changes just from that.

Screen Shot 2021-06-29 at 12.04.34 PM

The dividend review requirement difference is pretty minor. I suppose the only real difference is that the new index will immediately bounce any companies that cut or reduce their dividend, whereas the old index might hang on to it for a little longer if the dividend cut is only modest. Again, no big difference.

The three-day vs. one-day rebalancing window is something that was instituted in certain funds following the liquidity crunch during the COVID bear market. It's simply a mechanism to allow for a more orderly transition of holdings versus being forced to make all changes in a single day. A lack of liquidity could result in higher trading costs for the fund and the expanded window helps to mitigate that risk. Again, there's very likely no noticeable difference in what shareholders will usually experience.

Now, onto the important part! How the fund will actually change.

The old index is pretty diversified, but it does have a bit more of a cyclical lean than the new index will.

Nasdaq U.S. Dividend Achievers Index holdings

Nasdaq U.S. Dividend Achievers Index holdings

The new index while shift slightly towards more of a growth orientation, but the double digit allocations to six major sectors with little exposure to the others remains the same.

S&P U.S. Dividend Growers Index holdings

S&P U.S. Dividend Growers Index holdings

The biggest difference is that the allocation to the tech sector is about to go from 12.7% to 18.4%. All of the other sectors with 10%+ allocation are going to see reductions somewhere between 1-4%. Nine of the top 10 holdings exist in both indexes. The new index includes Abbott Laboratories (ABT) instead of Walmart (WMT).


The difference in sector allocations is really the only thing you could consider potentially more than a minor change. The changes in selection, weighting and rebalancing (although quite minor) are positive for VIG going forward.

Overall, even with the portfolio composition changes, I don't suspect investors will really notice any difference. The core selection criteria is still the same and that will continue to make VIG a great choice for dividend growth investors.

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