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The low interest rate environment in the economy has many investors looking beyond the conventional sources of income for higher yielding avenues. Not only has this highlighted the desperation of the yield hungry investors, but it has also distorted the highly fragile risk return tradeoff of the typically conservative income seeking investors (read Cambria Launches Shareholder Yield ETF (SYLD)).
This has led to a great deal of pressure on the domestic high yielding equity space for quite some time now as most of the securities and dividend ETFs have seen a considerable amount of interest over the past year or so. While this might still not ring alarm bells yet, it is a certain fact that their valuations have reached high levels.
Having said this, it is still prudent to note that income equity ETFs have a tradition of exhibiting far lesser realized volatility than most ETFs whose primary objective is capital growth. Consequently, for investors seeking to ride out the drought in the yield front, the dividend focused ETFs are probably still great choices in this type of environment (read What Does Your Income ETF Focus On?).
This is of course assuming a predefined level of risk tolerance for the investors who are unwilling to undertake additional ounces of risk in their portfolio. A prime example in this context would be international dividend equity ETFs, as these provide income opportunity with reasonable valuations, but have an extremely vulnerable component associated with their investments—currency risk.
Nevertheless, for investors seeking to stay within their domestic boundaries in their quest for yields, the Vanguard Dividend Appreciation ETF (VIG) fits the bill like no other. This is due to its extremely conservative approach, as well as its top Zacks ETF Rank, which suggests that outperformance could be ahead for this fund too.
About the Zacks ETF Rank
This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, a Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk (see Zacks ETF Rank Guide).
Using this strategy, VIG has received a top Rank of 1 or ‘Strong Buy’, and thus could be an interesting choice for investors. For those intrigued by this, we have highlighted this dividend ETF in greater detail below:
VIG in Focus
VIG was launched in April of 2006 and is one of the most popular choices available to the investors in the U.S. equity dividend ETF space. It has a massive asset base of about $16 billion and charges a paltry 13 basis points in fees and expenses (read Time for Preferred Stock ETFs?).
From a sector viewpoint the ETF has maximum exposure in the defensive and high yielding Consumer Staples sector with around 24% allocation. This is followed by Industrials and Consumer Discretionary sectors with around 18.30% and 13.10% allocation respectively.
The ETF follows the NASDAQ US Dividend Achievers Select Index which tracks the performance of stocks which have a historical trend of increasing dividend payments. The time frame in consideration for this shortlist of stocks is based on increased dividend payments for at least 10 years, resulting in a 30 Day SEC yield of 2.1%.
Naturally, the underlying investment objective seems quite sound, as companies which increase dividends for the preceding 10 years can be considered to have reasonably sound business fundamentals, and low risk profiles (see Time to Buy Top Ranked Retail ETFs?).
As such, we have a ‘Low’ risk outlook for VIG in the near term. However, being termed as low risk definitely does not mean low returns for the ETF.
In fact, in a long term look, VIG seems to have outperformed the broad market, as represented by the SPDR S&P 500 ETF (SPY). This has been a pretty long term trend too, as you can see in the five year comparative chart below:
As we can see, VIG has comfortably beaten SPY over these long time frames as well. Also, with the current interest rate scenario expected to remain low for some more time, VIG surely seems to be a good place for domestic investors who are searching for a winning combination of yields and outperformance in the months ahead as well.
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SPDR-SP 500 TR (SPY): ETF Research Reports
VANGD-DIV APPRC (VIG): ETF Research Reports
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