With the Fed continuing to maintain key interest rates at zero to 0.25%, interest in exchange-traded funds among investors remains strong. These funds track the performance of a particular index and are traded like securities. Investors have been buying heavily into these high-yield ETFs to chase the higher interest income they provide. During the first quarter of the year alone, investors put $53.1 billion of their money into ETFs, and these Funds have seen inflows of over $50 billion in four out of the five previous quarters. The Vanguard Dividend Appreciation ETF (NYSEA: VIG), which is currently trading at $69.40 per share is among the most popular ETFs among investors. If you don't yet have this ETF as part of your portfolio, you should definitely consider adding it now. Here's why.
Why the VIG ETF is Popular with Investors
The Vanguard Dividend Appreciation ETF tracks the NASDAQ Dividend Achievers Select Index's performance. This Index is composed of securities that have enjoyed at least ten consecutive years of growing annual dividend payments. Since the Vanguard Dividend Appreciation ETF was launched in April 2006, it has grown to become the largest dividend with close to $15 billion in assets under management (AUM). As of April 30, it has some 147 stocks and total net assets valued at $18.5 billion.
Vanguard Dividend Appreciation ETF boasts of some of the largest American companies as part of its holdings, including food and beverage giants PepsiCo (NYSEA: PEP) and Coca-Cola (NYSE: KO) , fast food chain McDonald's (NYSE: MCD), retail giant Wal-Mart (NYSE:WMT), global health care company Abbott Laboratories (NYSE: ABT) and consumer goods company Procter & Gamble (NYSE: PG). Its ten largest holdings comprise close to 40% of total holdings. The Fund's portfolio is also well diversified among a wide variety of sectors, including consumer staples (24.2%), industrials (18.3%), consumer discretionary (13.1%) and energy (12.4%).
To secure their holdings' continuous quality, the Fund's index provider Mergent, regularly weeds out wobbling funds that do not meet the financial strength guidelines, resulting in a Fund that favors the quality of its holdings over high returns. As testimony to the effectiveness of its selection criteria, the Fund's holdings have included companies whose compounded annual rate dividends have increased to 7.2% despite the economy suffering through one of its deepest recessions. In fact, Vanguard Dividend Appreciation ETF has even succeeded in outperforming the S&P index, with the Fund's average annual dividend growth from 2007 to 2012 reaching 7.2% while the S&P 500 increased by an average of just 1% a year over the same period.
There are other reasons why the Fund is popular with investors, including its low expense ratio, which makes it more affordable, as well as its high dividend payout. Its expense ratio is currently around 0.13% or 88% lower than the average for equivalent funds with similar holdings. Vanguard Dividend Appreciation ETF paid out dividends to its investors of $1.41 per share, an increase of more than 60% over the 87.3 cents it paid out in 2007.
The Vanguard Dividend Appreciation ETF as a Hedge against Inflation
Recently, the US Fed has indicated that it may end QE sooner than anticipated, which has led to concerns that there would be a sell-off among investors of ETFs as interest rates increase. However, there is a good reason why you should keep the Vanguard Dividend in your portfolio even if this happens - as a hedge against inflation. While investors have traditionally turned to precious metals such as gold and silver to protect their net worth, the boom in gold may finally be at an end as the US economy recovers and the Fed scales back its asset purchases, reducing demand for the metal as an investment haven.
Meanwhile, the famous brands that comprise the Vanguard Dividend Appreciation ETF holdings enjoy pricing power that protects their investors against inflation. Over the long term, these brands have the ability to raise their retail prices to keep up with increases in their input costs, and even slightly above them.
In addition, investors can enjoy a great, if not exceptional, yield with the Vanguard Dividend Appreciation ETF, of 2.17%, which is only slightly higher than the average S&P dividend yield. However, for investors who are holding on to the Vanguard Dividend Appreciation ETF as a way of appreciating capital in the long term, this yield is more than satisfactory.
The Bottom Line
While some analysts are predicting that the party is over for ETFs, with the Fed showing signs that it may end quantitative easing, the Vanguard Dividend Appreciation ETF still has enough going for it to make it worthwhile for investors to keep it as part of their long-term portfolios. The top brands that comprise the Fund's holdings are sure to continue performing strongly, allowing the fund to be a great hedge against inflation. And its yield, while not outstanding, is a great way for investors to build capital for their retirement.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.