Vanguard Changes Benchmarks For Two Popular Dividend Growth ETFs
This past June 1, Vanguard announced a change to the target benchmarks for two of their extremely popular dividend growth ETFs: Vanguard Dividend Appreciation ETF (VIG) and Vanguard International Dividend Appreciation ETF (VIGI).
Briefly, both funds will switch to using indices provided by S&P Dow Jones Indices. With respect to the reasons for the change, Kaitlyn Caughlin, head of Vanguard Portfolio Review Department, stated:
“We believe S&P Dow Jones Indices’ approach to dividend indexing closely aligns with Vanguard’s views, and we are confident that S&P DJI is well-positioned to administer the indexes moving forward.”
Digging Into the New Index
I thought readers might be interested in some of the features of the new index, so decided to dig in a little.
Here are just a few highlights from the methodology PDF provided by S&P DJI.
Similar to VIG’s previous index, to be eligible for inclusion a stock must have increased its dividends each year for the past 10 years. The analysis is performed by calendar year, with January as the reference point. However, the review is performed monthly, so all tests are kept very current.
In the case of a security being considered for first-time inclusion in the index, stocks in the top 25% of all dividend yields are excluded. This screen both minimizes turnover as well as excludes securities whose high dividend level might possibly be masking underlying weakness.
In the case of existing securities in the index, stocks in the top 15% of all dividend yields are removed, for reasons similar to the previous point.
Finally, constituents are float-adjusted market capitalization (FMC) weighted, subject to a single constituent weight cap of 4%. Essentially, that means that no one stock is ever allowed to exceed a weighting of 4% in the portfolio. What happens if one stock’s market cap were to rise in value such that it would exceed that threshold? Any excess weight is proportionally redistributed to the uncapped constituents. This process proceeds iteratively until no constituent violates the 4% cap.
Lastly, at the outset, I also referenced the international variant of this ETF. The only difference in the index structure is that, as opposed to a record of 10 years of dividend growth, a slightly more lenient requirement of 7 years is applied in the case of the international variant.
A Couple of Final Thoughts
In addition to what I covered above, one other minor adjustment was featured in the Vanguard announcement. Here is a brief excerpt.
The periodic changes to add, remove, or rebalance the constituent stocks in each index will take place over three days instead of one day. (Italics mine)
This may not seem like a huge deal, but Vanguard maintains that it will help them both manage transaction costs and minimize tracking error. As opposed to being forced to complete all trades within one business day, when other traders might use that knowledge to their own advantage, all necessary transactions can be conducted in a more orderly manner.
Finally, the expense ratios for each ETF remain the same: .06% for VIG and .20% for VIGI.
If you either currently hold one or both of these ETFs, or have been considering them for your portfolio, I hope that this brief summary & update has been helpful.
I last wrote about VIG on Seeking Alpha back in 2019, if you’re interested in taking a closer look.
Thanks for reading, and I hope to return with another article soon.