Not long ago, I made an argument in favor of replacing a simple, passive investment in the S&P 500 (SPY) for one in WisdomTree U.S. Dividend Growth ETF (DGRW). I concluded that "over the long haul, I believed DGRW would continue to be a slightly superior alternative to investing passively in stocks and even most other dividend funds."
Today, I am ready to revisit my last statement and face off DGRW against the Vanguard Dividend Appreciation ETF (VIG) - at some point, I owned both in my portfolio. Could Vanguard top WisdomTree in the dividend growth space?
To get started, let me compare a few key features of both funds. The table below helps to summarize my key observations.
Source: D.M. Martins Research, using data from Vanguard and WisdomTree
Perhaps the most important difference between VIG and DGRW is each fund's investment approach.
Vanguard's ETF tracks the Nasdaq US Dividend Achievers index, which in turn seeks "a select group of securities with at least ten consecutive years of increasing annual regular dividend payments." WisdomTree's benchmark index, on the other hand, uses a more intricate set of rules to decide what stocks to include in the portfolio: large-cap "dividend-paying stocks with growth characteristics" that meet or surpass certain hurdles in long-term earnings growth expectations as well as historical ROE and ROA.
This difference above may explain a few key characteristics of each ETF. For example, the forward-looking earnings growth component of DGRW probably justifies the predominance of technology stocks in the fund, which in turn might explain its superior performance over the past six years (more on this below).
On the other hand, VIG is a bit more exposed to the traditional blue-chip names that have been dividend-growing champions for a multi-year period. For example, "old economy" names like Procter & Gamble (PG), Johnson & Johnson (JNJ) and Walmart (WMT) feature among VIG's top five names, whereas Apple (AAPL) and Microsoft (MSFT), number one and number two holdings, respectively, make up nearly 10% of DGRW's total allocation.
Other important considerations
When analyzing an ETF, I tend to focus on a couple of other important factors that help me understand whether the fund is worth consideration. The main ones are management costs and past performance.
On fund expenses, VIG shines compared to DGRW. The former charges a microscopic 0.08% annual fee that is less than one-third the size of its counterpart's expense rate. The cost advantage could be justified by either the more "plain vanilla" investment strategy, or (more likely, in my view) the much larger size of VIG's assets under management that provides Vanguard with the benefit of scale and the price competitiveness.
On past returns, VIG has lagged the absolute performance of the DGRW (and the SPY, for that matter) over the previous several years - see chart below. The main reason for the under-performance, if my view, is the fund's focus on backward-looking dividend growth trends in a time when forward-looking earnings growth has produced better results (see my recent article on the growth vs. value dynamic).
Further contributing to the slightly inferior past performance is VIG's dividend yield of 1.9%, lower than DGRW's 2.6%. At first, I would have not expected the latter to be a higher yielding ETF than the former, given its investment strategies. But in any case, helping to offset the gap, VIG has the 20-bp annual management fee advantage over its peer that was discussed above.
Source: D.M. Martins Research, using data from Yahoo Finance
After looking a bit closer at VIG and DGRW, I believe each ETF serves slightly different purposes. While both are categorized as "dividend grower" funds, the Vanguard product is more concerned with identifying dividend champions based on past dividend payment trends, while WisdomTree's ETF might be better suited for investors looking for more robust earnings growth prospects without losing sight of quality factors like yield and past return on equity.
For the time being, I continue to see in DGRW a slightly superior approach to dividend investment than VIG. But I certainly see benefits to owning each of them, with VIG standing out in regards to size, liquidity and costs.
I own a number of dividend-paying stocks in my "All-Equities SRG" and "The 10% Yielder" portfolios - both of which I discuss regularly with my Storm-Resistant Growth community. To dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.
Disclosure: I am/we are long AAPL, MSFT. 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.