Vanguard currently manages a lineup of 86 ETFs, and as you might expect, the majority are broad market index-tracking products. However, Vanguard also offers some specialized strategies.

Notably, this includes 11 sector ETFs, some actively managed bond funds, and a quartet of U.S. and international dividend growth and yield ETFs respectively.

Today, I'm taking a closer look at the Vanguard Dividend Appreciation ETF (VIG) to determine if it's a solid choice for dividend growth investors. Here's my opinion.

VIG: What I like

There's a lot to appreciate about VIG, which commands an impressive $82 billion in assets under management, largely due to its very appealing fee structure.

With an expense ratio of just 0.06%, you're looking at about $6 in annual fees per $10,000 invested—a small price for the value it offers, and especially so when compared to competitors.

VIG's benchmark, the S&P U.S. Dividend Growers Index, also provides a more nuanced approach compared to some other single-dimension dividend growth ETFs like the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which I discussed a few weeks back.

Unlike NOBL, which primarily focuses on the length of the dividend growth streak, VIG employs a multifaceted process. This index not only requires a 10-year history of dividend growth but also implements a quality screen by excluding the top 25% of companies with the highest yields, effectively sidestepping potential yield traps.

The ETF employs a market-cap weighted strategy with a cap of 4% on any single stock, which is rebalanced quarterly. This curtails portfolio turnover significantly, evidenced by its low turnover rate of 13.4%. The result is a diversified portfolio of 339 stocks that roughly mirrors the sector composition of the S&P 500, with a higher emphasis on quality and less top-heavy.

In terms of performance, VIG not only delivers returns close to those of the SPDR S&P 500 ETF (SPY) but also offers superior risk-adjusted returns with a Sharpe ratio of 0.47 versus 0.43 for SPY.

Finally, VIG shows statistically significant loadings to the profitability (RMW) and investment (CMA) factors, both of which play an important role in identifying quality stocks.

VIG: What I dislike

While VIG doesn't present any major shortcomings, there are a few nuances that might not perfectly align with every dividend investor's goals.

The 1.7% 30-day SEC yield of VIG might not capture the attention of those looking for high current income. This is a natural result of the fund's focus on companies that prioritize dividend growth and quality over high immediate yields.

VIG's approach means its holdings are generally priced at or above market, reducing exposure to undervalued stocks. While this aligns with the fund's strategy to invest in companies with strong profitability, it may limit opportunities that value-focused strategies might capture.

Ideally, incorporating a fundamental weighting approach, similar to how some WisdomTree dividend ETFs operate, could enhance VIG. This would involve weighting companies based on total dollar dividends paid, which could provide a more nuanced reflection of a company's financial contribution to the fund, beyond just yield.

Finally, the exclusion of REITs from VIG's portfolio is a deliberate choice by Vanguard to avoid the sector's unique tax implications and volatility. For investors looking to diversify into real estate for its potential yield and growth, this might seem like a missed opportunity. That being said, this gap can easily be filled by adding a separate REIT ETF to one's portfolio.

VIG: My verdict

I'd give VIG a solid 9 out of 10. It stands out as an affordable, well-diversified dividend growth ETF that effectively captures the quality factor. Its broad and sector-neutral composition makes it suitable as a core portfolio holding, not just a satellite position.

Building around VIG can be strategically beneficial. One intuitive approach is to pair it with the Vanguard High Dividend Yield ETF (VYM) to enhance income and gain exposure to value stocks, balancing VIG's focus on dividend growth and quality.

For those looking to broaden their international exposure, the Vanguard International Dividend Appreciation ETF (VIGI) complements VIG by applying a similar strategy outside the U.S.

Lastly, considering VIG primarily targets large-cap stocks, integrating a small-cap ETF could provide beneficial exposure to the size factor. Adding a small-cap value ETF, like the Vanguard Small-Cap Value Index Fund ETF (VBR), would not only balance the size exposure but also introduce a value component that VIG lacks.