Fund name: Vanguard Dividend Appreciation Index fund (VDAIX)

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:

 

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: http://flagship3.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0602&FundIntExt=INT

 

Other useful links

Mergent’s analysis of the competing dividend growth indexes: http://www.mergent.com/publish/DivETF%20White%20Paper-Final-F.pdf

The American Stock Exchange.  If you type the index symbol (DVG) into the search box, you can see the entire composition of the index now – rather than wait for Vanguard to meet a later statutory deadline.  http://www.amex.com/

 

May 1, 2006