Friday, April 21, 2006

Vanguard Dividend Appreciation Index Fund

Vanguard is planning to launch a new dividend ETF on April 21, 2006. At the moment there is very little information out there about this fund. Russell Bailyn, recently interviewed Noel Archard of the Vanguard’s VIPERs Institutional Sales Team. Noel mentioned that he thought that demographic trends and tax advantages are leading investors towards dividends. Speaking for myself, I like getting dividend checks.

Based on the latest 485A Post-effective amendment (a tentative prospectus) filed for the fund, the fund will be based on a "Dividend Achievers Select Index" provided by Mergent. According to Vanguard, "The Fund's investment in the index will be within the capitalization range of the companies included in the Dividend Achievers Select
Index ($198 million to $378 billion as of February 28, 2006)."

This implies that the index is similar to Mergent’s Broad Dividend Achievers Index which is a total market index of companies that have raised dividends for 10 or more years. The broad index is the basis for the PowerShares Dividend Achievers Portfolio (PFM).

PFM is the runt of the dividend ETF litter, with a mere $23 million in assets under management. It is unclear if this because investors explicitly do not want broad market dividend funds or if this is merely a symptom of investors being satisfied with the existing major dividend ETFs (DVY),(PEY),(SDY) which have almost $7 Billion in assets combined. The success of WisdomTree’s funds depends on investor interest in total market dividend funds.

The 0.28% expense ratio of the Vanguard Dividend Appreciation VIPERs will be much cheaper than other dividend ETFs. DVY charges 0.40%, the Powershares dividend funds all charge 0.50%, the SPDR Dividend ETF charges 0.30%, and Morningstar Dividend Leaders (FDL) charges 0.45%. I think that the vanguard fund will dominate the other the other dividend ETF, with the exception of PID and SDY. PID remains the only international dividend fund. SDY is as cheap as the Vanguard fund and has a unique universe of Dividend Aristocrats that have raised dividends for at least 25 years.

IMHO Powershares and other sponsors will cut expense ratios or switch to monthly dividends if investors start switching. IMHO there is no real reason for exchange traded dividend funds to charge more than 0.30%. Dividend stocks are liquid and cheap to trade on the US Exchanges. Lower expense ratio's will also lead to higher yields, which is ultimately what income investors want.


At November 06, 2006 7:42 PM, Blogger Michelle said...

Hi MP. I found you when I was searching for info on PID. I am intrigued with it, but I've never bought anything outside my ROTH or 401k before. Do you think it's a bad idea for a taxable account? Also, PID's expense ratio is now up to 0.62 - higher than it was when you wrote the post - and it's still doing quarterly payments.

I'm wondering if you're a still a PID fan?? I have a pretty basic portfolio of all index funds up to now. Would you recommend it still?

Many, many thanks,


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