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Exchange traded funds or ETFs continued to enjoy strong inflows from investors seeking a high-yield investment option. For the first quarter of 2013, ETFs saw investor inflows of $53.1 billion, and have seen inflows of more than $50 billion in four out of the previous five quarters. ETFs are securities that track the performance of a basket of assets, an index or a commodity, while being traded on an exchange like a stock. ETFs offer many advantages to investors, including the ability to trade as little as one security, broad diversification of their investment portfolio as well as saving them money by having low expense ratios.

One of the most popular ETFs is the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG), which raked in $1.2 billion in the first quarter. With a yield of just 2.2%, VIG is not a high-dividend fund, but its main appeal to investors is that it has one of the best-quality holdings among ETFs. The VIG aims to track the performance of stocks in the NASDAQ Dividend Achievers Select Index, which have a record of increasing their dividends year after year. The Fund has a SEC Yield of 2.11% and an expense ratio of 0.13 percent. As of March 31, it has 147 stocks in its portfolio and total net assets of $17.6 billion.

In order to ensure the continued quality of its holdings, Mergent, the Fund's index provider, is constantly weeding out firms that fail to live up to its financial strength screens, resulting in an ETF that favors quality over a high yield. Its sector allocations as of March 31 include consumer staples 24%, industrials 18.7%, consumer discretionary 12.8%, energy 12.4%, materials 8.3%, financials 7.6% and information technology at 6.5%. Its current top ten holdings, which accounted for close to 40% of its total net assets include: PepsiCo (PEP), Procter & Gamble (PG), Coca-Cola (KO), Abbott Laboratories (ABT), Wal-Mart Stores (WMT), International Business Machines Inc. (IBM), Chevron (CVX), McDonald's (MCD), Exxon Mobil (XOM) and United Technologies Corp. (UTX). In order for a stock to be included in the Fund, it should have increased its dividend for at least ten consecutive years. Because of its selectiveness, the VIG has actually succeeded in including companies that have grown their dividends at a compounded annual rate of 7.2% despite the US's suffering through one of its deepest recessions.

In 2012, the Fund paid out dividends of $1.41 per share to its investors, a substantial increase over the 87.3 cents that it returned in 2007, its first full year of trading.

Although the Fund's dividend yield is similar to that of the Vanguard S&P 500 ETF, on a total return basis, the VIG has actually outperformed the S&P 500 ETF with less volatility over the preceding five years. While the Vanguard Fund enjoyed an average annual dividend growth of 7.2% from 2007 to 2012, the S&P 500 Index increased by only 1.01% annually over the same period. Because of this, the VIG has landed on many recommend lists for investors who are saving for their retirement and are looking for long-term gains rather than quick, short-term profits.

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Source: Why You Should Put Your Money In The Vanguard Dividend Appreciation ETF