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Are you looking to invest in an ETF geared towards generating dividends? If so, VIG and VYM are Vanguard ETFs that do just that.
VIG is focused on investing based on the historical performance of stocks to ensure a dividend return. On the other hand, VYM incorporates a forecasting approach to target stocks with a higher-than-average dividend yield.
Which one should you invest in?
In this post, we’ll compare VIG and VYM’s diversification, performance, fees, and tax efficiency to help you decide which is right.
What is VIG?
VIG, also known as the Vanguard Dividend Appreciation ETF, is an ETF that tracks the performance of the S&P U.S. dividend growers index. The fund is passively managed and attempts to fully replicate the index portfolio and performance.
The Index is designed to invest in companies that have consistently increased yearly dividends for the last ten consecutive years. The index excludes the top 25% of the highest-yielding companies.
What is VYM?
VYM or Vanguard High Dividend Yield ETF is an ETF that tracks the performance of the FTSE High Dividend Yield Index. Like VIG, the stock is passively managed and attempts full replication of the index portfolio and performance.
The index invests in stocks that are characterized by higher-than-average dividend yields based on the FTSE all-world index. This index combines forecasting and historical compared to VIG which is mainly based on historical performance.
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VIG vs VYM
| VIG | VYM | Edge | |
|---|---|---|---|
| Fund Type | ETF | ETF | Split Decision |
| Diversification | S&P U.S. Dividend Growers Index | FTSE High Dividend Yield Index | Tie |
| Inception Date | 2006 | 2006 | Tie |
| Number of Holdings | 316 | 454 | VYM |
| Minimum Investment | $1.00 | $1.00 | Tie |
| Expense Ratio | 0.06% | 0.06% | Tie |
| Tax Efficiency | ETFs generally are more tax efficient | ETFs generally are more tax efficient | Tie |
| Tax Loss Harvesting | Funds must settle and may need 1-2 days to be available for reinvestment | Funds must settle and may need 1-2 days to be available for reinvestment | Tie |
| Trading & Liquidity | Daily trading during Market Hours | Daily trading during Market Hours | Tie |
| Performance | -9.79% in 2023 | -0.42% in 2023 | VYM |
| Dividend Yield | 1.95% in 2023 | 3.13% in 2023 | VYM |
Diversification – Tie
VIG and VYM are two Vanguard ETFs that invest in dividend-focused companies by tracking the performance of companies with above-average dividend yields using two different indexes.
The table below shows the industry diversification for VIG and VYM.
| Industry | VIG | VYM | Difference |
|---|---|---|---|
| Information Technology | 22.10% | 7.50% | 14.60% |
| Health Care | 15.40% | 12.50% | 2.90% |
| Financials | 18.30% | 19.80% | -1.50% |
| Consumer Discretionary | 6.90% | 9.00% | -2.10% |
| Communication Services | 1.40% | 5.10% | -3.70% |
| Industrials | 13.10% | 12.10% | 1.00% |
| Consumer Stables | 12.20% | 12.80% | -0.60% |
| Energy | 3.50% | 11.80% | -8.30% |
| Materials | 4.40% | 2.30% | 2.10% |
| Utilities | 2.70% | 7.10% | -4.40% |
The table shows that VIG has a high concentration in information technology, health care, and financials, with the three industries making up approximately 56% of the portfolio.
VYM, on the other hand, has a high concentration in health care, financials, and consumer staples. These three industries compromise 45% of the VYM portfolio.
Next, let’s examine the table below for the top ten holdings of each fund.
| Company | VIG | VYM |
|---|---|---|
| Microsoft Corp. | 4.87% | |
| Apple Inc | 4.34% | |
| Exon Mobile Corp | 3.40% | 3.61% |
| UnitedHealth Group Inc | 3.37% | |
| JP Morgan Chase | 3.04% | 3.21% |
| Johnson & Johnson | 2.71% | 2.88% |
| Visa Inc Class A | 2.56% | |
| Procter & Gamble | 2.49% | 2.63% |
| Broadcom Inc | 2.40% | 2.57% |
| Mastercard Inc Class A | 2.39% | |
| Home Depot Inc | 2.35% | |
| Chevron Corp | 2.29% | |
| AbbVie Inc | 2.02% | |
| Merck & Co Inc | 2.01% | |
| PepsiCo Inc | 1.79% | |
| Total | 31.57% | 25.36% |
The table demonstrates that both funds have five of the same top ten holdings. VIG’s top 10 holdings account for 32% of the portfolio, while VYM’s top 10 holdings account for 25% of the portfolio.
VYM is more diversified because its industry composition and top ten holdings are not as concentrated as VIG.
Minimum Investment – Tie
VIG and VYM have investment minimums of $1. Both of these funds are highly accessible to investors and available by many brokerage firms, making them easy to invest in.
Both funds are ideal for any investment level.
Expense Ratio – Tie
Expense ratios are important because they determine how much you will pay from your returns to the fund for operating your portfolio.
VIG and VYM are Vanguard ETFs that are known for their low expense ratios. Both funds have an expense ratio of 0.06%, which makes them very low-cost compared to the industry average, which can be as high as 0.20%.
Trading and Liquidity – Tie
VGI and VYM have the same trading and liquidity characteristics since they are both Vanguard ETFs.
As ETFs you can buy and sell ETFs throughout the day at any time during market hours. This is not the case with mutual funds, which are only traded at the end of the day based on Net Asset Value (NAV). This benefit of ETFs doesn’t come without drawbacks, though – given that ETFs can trade throughout the day, they typically trade at prices slightly different from their NAV. This difference is called a bid-ask spread.
ETFs offer an advantage to investors who trade daily or change positions frequently. Since they can trade throughout the day, whereas mutual funds, you have to wait until the day is closed.
Tax Efficiency – Tie
When comparing two different investment options it’
When comparing two different investment options, it’s essential to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a huge impact on which investment generates higher after-tax returns.
Generally, ETFs will have a slight edge from a tax efficiency perspective. ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently from a mutual fund. However this is not a concern with Vanguard ETF and mutual funds due to their patented process. This makes Vanguard ETFs and mutual funds tax equivalent to each other.
It’s important to consider that VYM generates a higher dividend yield and, correspondingly a higher tax burden. As a result, while VYM is likely to generate higher yearly payments, this will be accompanied by a higher tax burden as well.
Tax Loss Harvesting – Tie
As ETFs, both have the same rules and regulations.
Tax-loss harvesting is a strategy that involves selling investments at a loss to offset gains (and up to $3,000 in ordinary income). Tax-loss harvesting only matters in taxable investment accounts since you aren’t taxed on capital gains in tax-deferred accounts. While this strategy can be implemented using any type of investment (stocks, ETFs, mutual funds, or other property), mutual funds have an advantage because of how they are traded.
When you sell an ETF, you’ll have to wait for the funds to settle before reinvesting the proceeds. You may have to wait one or two days before you have access to the funds, commonly called T+2.
Performance & Dividends
Next, let’s examine the total returns for both VIG and VYM.
In the table below, you can see that, over the last nine years, VIG has outperformed VYM in four years. Particularly in 2017-2020, VIG has outperformed VYM with an average of 7.37%. In the other five years, VYM has outperformed VIG by 4.52%.
That said, when you compare total returns over the last nine years, the difference is marginal at only 0.77% in favor of VIG.
| Total Returns by NAV | |||
|---|---|---|---|
| Year | VIG | VYM | Difference |
| 2022 | -9.79% | -0.42% | -9.37% |
| 2021 | 24.64% | 26.14% | -2.50% |
| 2020 | 15.46% | 1.14% | 14.32% |
| 2019 | 29.71% | 24.20% | 5.51% |
| 2018 | -2.02% | -5.87% | 3.85% |
| 2017 | 22.22% | 16.42% | 5.80% |
| 2016 | 11.84% | 16.87% | -5.03% |
| 2015 | -1.95% | 0.33% | -2.28% |
| 2014 | 10.06% | 13.47% | -3.41% |
The table below shows the cumulative returns of VGI and VYM. Here, we can see that VIG outperforms VYM over every time period except the 3-year period. In terms of cumulative returns, VIG has a clear advantage over VYM.
| Cumulative Returns by NAV | |||
|---|---|---|---|
| Year | VIG | VYM | Difference |
| 1-Yr | 5.18% | -2.50% | 7.68% |
| 3-Yr | 28.90% | 38.84% | -9.94% |
| 5-Yr | 62.37% | 41.95% | 20.42% |
| 10-Yr | 157.86% | 129.62% | 28.24% |
The table above shows the cumulative returns of VGI and VYM. Overall, we can see that VIG outperforms VYM over every time period except the 3-year period.
In terms of cumulative returns, VIG has a clear advantage over VYM.
When looking at the performance of two dividend ETFs, the most important metric might be dividend yield. Below, we can compare the average annual dividend yield between VIG and VYM.
| Year | VIG | VYM | Difference |
|---|---|---|---|
| 2023 | 1.95% | 3.13% | -1.18% |
| 2022 | 1.85% | 2.94% | -1.09% |
| 2021 | 1.56% | 2.85% | -1.29% |
| 2020 | 1.77% | 3.70% | -1.93% |
| 2019 | 1.83% | 3.12% | -1.29% |
| 2018 | 1.86% | 2.92% | -1.06% |
| 2017 | 2.03% | 2.91% | -0.88% |
| 2016 | 2.17% | 3.07% | -0.90% |
| 2015 | 2.17% | 2.98% | -0.81% |
| 2014 | 1.91% | 2.79% | -0.88% |
| 2013 | 1.98% | 2.79% | -0.81% |
The table above shows that VYM has a clear advantage over VIG. Over the last eleven years, VYM has outperformed VIG by 1.10%. Overall, VYM consistently delivers a dividend yield of 3% while VIG’s dividend yield is just under 2%.
VIG vs VYM: Who Should Invest?
VIG and VYM both aim to generate dividends by investing in stocks that show high growth in dividend yield or above-average dividend yield.
While they aim for the same goal to generate high dividends, they use two different indexes as a baseline. VIG uses the S&P U.S. Dividend Growers Index which compromises approximately 300 stocks while VYM uses the FTSE High Dividend Yield Index which compromises approximately 450 stocks.
The two indexes result in different portfolio diversifications. VYM is more diversified between the different industries. The top three industries only account for 45% compared to 56% for VIG. Likewise, the top 10 stocks account for only 25% of the VYM portfolio compared to 32% for VIG.
Another key distinction between these two portfolios is their performance. First, VYM has a clear advantage over dividend yield. Over the last 10 years, VYM has outperformed VIG by over 1%.
Compared to total annual returns over the last 9 years, VIG has only outperformed VYM by 0.77%. With that said over the last two years of performance, VYM has outperformed VIG by nearly 6%.
Overall if the priority is higher dividend yields and more diversification then VYM is the better option. All other things held equal, VIG and VYM are nearly identical in tax loss harvesting rules, expense ratios, and minimum investments.
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