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Fund name Vanguard Dividend Appreciation Index fund

Fund name: Vanguard Dividend Appreciation Index fund (VDAIX) (Update)

Objective: VDAIX and its VIPER clone are design to track the “Mergent Dividend Achiever Select Index (DVG) . . . a modified market capitalization index designed to track the performance of companies that have historically increased and paid dividends annually and are listed for trading on the American Stock Exchange, New York Stock Exchange,” or NASDAQ.

Adviser: The Vanguard Group.  Vanguard was founded in 1975 by John Bogle.  It manages about a trillion dollars in 130 US and 40 non-US mutual funds.

Manager: Ryan E. Ludt, who manages Vanguard's Large Cap index and VIPER funds.  He has been with Vanguard since 1997.

Opening date: April 27 2006

Minimum investment: $3000 as a mutual fund; it will also be offered as an exchange-traded VIPER, with no minimum.

Expense ratio: 0.40%.

Comments: Well here’s another sign of America’s perilous decline and moral danger.  First it was the ports deal, in which the government proposed allowing a bunch of furriners to run our seaports.  And now we’re letting ‘em design our index funds.  Where will the madness end?

Vanguard’s new Dividend Appreciation index fund will track the Mergent Dividend Achievers Select Index.  And Mergent is owned by Xinhua Financial, “China's premier financial services and media company.” Mergent, the former Moody’s Investors Services division, was acquired by Xinhua in 2004. 

Vanguard is struggling to compete in the increasingly-crowded world of dividend-oriented ETFs.  They first filed a prospectus for this fund with the SEC in September of 2005, then filed a revised prospectus in February 2006 and another in April 2006.  Vanguard’s representatives have referred to this as “a troubled launch.”

The Vanguard fund and ETF were preceded by the popular iShares Dow Jones Select Dividend Index (DVY), BlackRock Dividend Achievers (BDV) and PowerShares High Yield Equity Dividend Achievers Portfolio (PEY).  Between them, they have drawn over $8 billion (about 75% to DVY) in under three years. The field will get more crowded now that Morningstar has licensed its proprietary dividend growth list to First Trust Advisors for use in First Trust Morningstar Dividend Leaders Index Fund (FDL) which debuted March 15 and drew $30 million in its first week of operation.

Is there a reason to choose the Vanguard offering over the others?   Vanguard’s expense ratio is frugal, as always, at 0.40%.  Their competitors charge between 0.40 (DVY) and 0.84% (BDV), so there might be room for a slender advantage against some of them.  It’s the only one available as an open-end mutual fund, which will allow you to dodge brokerage fees.  And there’s a convenience factor if you’re already investing with Vanguard.

Beyond that, the portfolio differences are interesting, but a challenge to decipher:






Index provider

Dow Jones




Number of stocks





Market cap (B)

12.4 ave.

4.1 ave.

2.7 median

17 ave.











Top sector

Financial services, 41%

Financial services, 50%

Financial services, 41%


Top holding

Altria, 3.8%

People’s Energy, 2.9%

Citigroup, 10%

AIG, 4%


Bottom line: There are two reasons for investing in a “dividend leaders” fund.  Either you’re looking for the boost in total return offered by the dividends or you believe that companies which boost their dividends are intrinsically superior to others.  In their quest for diversification, Vanguard included many stocks with low current yield and so they lose on the first count; their yield barely matches the S&P 500’s.  And while their portfolio is clearly different from the others, Vanguard hasn’t said why it’s clearly superior.  For the present, the VIPER will hardly be worth the bother.  Investors interested in a no-load, mid- to large-cap value index fund might find a home here.

Company website: Vanguard Dividend Appreciation Index Fund Investor Shares
May 1, 2006

Update (posted July 1, 2010)

Assets: $3.8 billion Expenses: 0.35%
YTD return (through 6/17/10): 1.2%
Our original thesis: "Investors interested in a no-load, mid- to large-cap value index fund might find a home here."

Our revised thesis: VDAIX is modestly but consistently beating most of its peers. A "dividend appreciation" focus is useful either because the dividends themselves boost total returns and reduce volatility or because companies boosting their dividends are generally better investments than others. To date, the latter is better supported than the former.

VDAIX boasts a dividend yield of 2%, roughly comparable to the yield on the S&P500 but less than half that of many dividend-focused ETFs. Nonetheless, VDAIX has, since inception, handily beaten the S&P 500 and most of the cadre of dividend-oriented ETFs including iShares Select Dividend Index (DVY), PowerShares HighYield Dividend Achievers (PEY) and First Trust Morningstar Dividend Leaders Index (FDL).

The requirement of 10 consecutive years of dividend increases tends the portfolio toward corporate leaders: firms with strong, sustainable advantages and consistent cash flow. As a result, its performance has paralleled corporate leader funds such as Bridgeway Blue Chip 35 (BRLIX), ING (formerly Lexington) Corporate Leaders (LEXCX) and the (over-hyped) PowerShares RAFI 1000 (PRF). VDAIX has been modestly less volatile than Bridgeway or ING, and much less volatile than the RAFI fund. On whole, it’s less value-oriented and has a larger market cap than most dividend oriented funds, but has put up strong returns by investing in businesses that have the prospect of steadily strengthening positions.

Folks who have, sensibly enough, concluded that active managers will be hard put to win at the game of investing in US large caps seem to have a very credible alternative to traditional cap-weighted indexes here.

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