A recent article in The Wall Street Journal attempts to compare the Vanguard Dividend Appreciation ETF (VIG) to iShares Select Dividend ETF (DVY) and other “peer dividend ETFs.” As is typical for such cursory analyses, the article lumps together ETFs with the word “dividend” in their name, and focuses on short-term (up to three years) returns to draw conclusions about the funds’ performance. The article only briefly touches on the difference of holdings of the two funds.
So, what are the proper ways to compare these funds? Here is one alternative comparison based on Sharpe Ratios (all figures calculated and published by Morningstar):
|ETF||Ticker||Category||3-Year SR||5-Year SR|
|Vanguard Dividend Appreciation||VIG||Large Blend||0.99||0.46|
|iShares Select Dividend Index||DVY||Mid-Cap Value||1.31||0.40|
|PowerShares FTSE RAFI US 1000||PRF||Large Value||0.83||0.42|
|WisdomTree LargeCap Dividend||DLN||Large Value||1.20||0.36|
|SPDR S&P Dividend||SDY||Large Value||1.10||0.53|
|iShares High Dividend Equity||HDV||Large Value||N/A||N/A|
In the longer 5-year period, which spanned a major market downturn, the Vanguard ETF exhibited a return/risk characteristic superior to that of the iShares ETF. However, the SPDR S&P Dividend ETF beat both according to that measure.
Another way to compare the first two of these ETFs is to use the dividend discount model to arrive at the expected rate of return. According to the article, the Vanguard ETF’s holdings currently yield about 2% in dividends and are expected to generate over 9% of earnings growth in the next three to five years. Assuming that the current dividend payout ratios and earnings growth rates stay approximately constant in the future, the ETF should return about 11% per year in total. For the iShares ETF, these figures are 7%, 4%, and also 11%, respectively. However, these identical results stem from vastly simplifying assumptions.
Finally, the two ETFs address different segments of the equity market. According to Morningstar, in the last three years the Vanguard ETF was most closely matched by the US Core Total Return index, while the iShares ETF’s best fit index was the Dow Jones Industrial Average Price Return index. This indicates that since the iShares ETF effectively tracked a much more narrowly focused index, it should not necessarily be compared to the more broadly-oriented Vanguard ETF. Indeed, Morningstar classifies the Vanguard ETF into the Large Blend category, while it puts the iShares ETF in the Mid-Cap Value category. Hence, the two ETFs are not really peers. Only the rest of the above dividend ETFs could be considered peers by virtue of the common, Large Value, category.