VIG & VIGI changed benchmarks

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ChinchillaWhiplash
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VIG & VIGI changed benchmarks

Post by ChinchillaWhiplash »

Just a FYI, Vanguard dividend appreciation funds have both changed their benchmarks recently. New index is supposed to help keep turnover down from before. Also changes some of the screening process. Any idea if this is going to significantly impact these funds?
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anon_investor
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Re: VIG & VIGI changed benchmarks

Post by anon_investor »

ChinchillaWhiplash wrote: Mon Aug 02, 2021 8:13 am Just a FYI, Vanguard dividend appreciation funds have both changed their benchmarks recently. New index is supposed to help keep turnover down from before. Also changes some of the screening process. Any idea if this is going to significantly impact these funds?
I have VDADX (the mutual fund version of VIG) and I have been tracking both the current and new bench marks for a few weeks now since they announced the change, day to day they are within a few basis points of each other (up or down). I think the performance will be nearly identical. I have no plans to sell any of my holdings.
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JoMoney
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Re: VIG & VIGI changed benchmarks

Post by JoMoney »

The style of being a fund of stocks that have long histories of consistently paying and raising dividends hasn't changed. It will predominately be the same stocks, same style, and highly correlated with each other. I think one can pretty safely say there will not be a "significant impact" from one to the other.
Generally I'm convinced lower turnover is a minor improvement for passive investors. Lower transaction costs, lower taxable events, and lower management/trading risk (I think those trading on average or below average information are more likely to be at a disadvantage on any trade.)
There will likely be some small differences between the indexes, but I don't believe anyone can tell you in advance in which ones favor that would be.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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ChinchillaWhiplash
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Re: VIG & VIGI changed benchmarks

Post by ChinchillaWhiplash »

Any idea if the number of holdings in the funds are going to change significantly? Not that it matters much, but was wondering if the funds would still be fairly diversified with a large number of companies.
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anon_investor
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Re: VIG & VIGI changed benchmarks

Post by anon_investor »

ChinchillaWhiplash wrote: Mon Aug 02, 2021 5:56 pm Any idea if the number of holdings in the funds are going to change significantly? Not that it matters much, but was wondering if the funds would still be fairly diversified with a large number of companies.
This is the new index it will be tracking:
https://finance.yahoo.com/quote/^SPUDIGUP
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JoMoney
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Re: VIG & VIGI changed benchmarks

Post by JoMoney »

The top 10 stocks in the "S&P U.S. Dividend Growers Index"

Code: Select all

Microsoft
Johnson & Johnson
Visa
JP Morgan Chase
Unitedhealth Group
Procter & Gamble
Home Depot
Comcast
Coca-Cola
PepsiCo
The top 10 stocks in the "NASDAQ US Dividend Achievers Select Index"

Code: Select all

Microsoft
JP Morgan Chase
Johnson & Johnson
Walmart
Visa
Unitedhealth Group
Home Depot
Procter & Gamble
Comcast
Coca-Cola
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
lvm919
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Re: VIG & VIGI changed benchmarks

Post by lvm919 »

Pretty hefty distribution on VIGI. Guess there were some major changes that needed to be made to track the new index. Is there any resource that identifies the sources of a fund's distribution, like "3% of distribution from Company A dividend, 5% due to capital gain from selling Company B shares" etc...
You will have to give back your multiples.
sycamore
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Re: VIG & VIGI changed benchmarks

Post by sycamore »

lvm919 wrote: Mon Dec 20, 2021 9:20 am Pretty hefty distribution on VIGI. Guess there were some major changes that needed to be made to track the new index. Is there any resource that identifies the sources of a fund's distribution, like "3% of distribution from Company A dividend, 5% due to capital gain from selling Company B shares" etc...
I don't know if there's any resource that breaks it down quite like that.

A similar situation (large capital gains distribution) happened with Vanguard's Target Retirement funds this year. In another thread, Boglehead cas provided a write-up (below) that you may be able to apply to VIGI. Looks like it requires digging into the annual and semi-annual report.
cas wrote: Thu Nov 18, 2021 10:51 am Looking at the annual report (9/30/2020) and semi-annual report (3/31/2021)...

(Disclaimer: Everything is hazy, since the most recent available report is from 3/31/2021, which leaves the financial events in the most recent 6+ months unknown.)

Summary: Cause seems very roughly about 2/3rds from needing to meet net redemptions and 1/3rd from rebalancing.
Unknown why net redemptions (from a 2040 target date fund) were so large compared to previous years.

Long version, showing work:

1. A lot more people were selling their shares than were buying new shares, so they had to sell assets (mostly stocks) to meet redemptions. This was a big change from the previous year.

-For the year ending 9/30/2020, they had $1.1 billion more coming in from new purchases than they had going out due to redemptions.
-For the 6 months ending 3/31/2021, they had $2.4 billion more going out due to redemptions than they had coming in due to new purchases.

(Source: "Statement of Changes in Net Assets" for the 2040 fund in the relevant report.)

Why? I don't know. Various changes in people's investing behavior have been reported during the pandemic, but I don't know if any of that or something else entirely caused the switch to net redemptions in a target date fund.

People have noted that the institutional target date funds do not have the large cap gain distributions. Is the institutional version perhaps not a share class of the "regular" version? (I didn't look it up.) If so, were companies perhaps shifting from "regular" to "institutional" within their 401(k)s, causing net redemptions in the "regular" target date fund?

2. Rebalancing, although in the 6 months that can be seen in the report the rebalancing seems to be less of a factor than the net redemptions.

-For the year ending 9/30/2020, they sold 3.9 billion of assets (very roughly half stocks and half bonds) for a realized cap gain of 41 million.
-For the 6 months ending 3/31/2020, they sold 4.0 billion of assets (mostly stocks) for a realized cap gain of 1.1 billion. (***1.1 billion vs 41 million is a big flashing light, as far as cap gain distributions***)

-For the year ending 9/30/2020, they bought 4.7 billion worth of assets (very roughly half stocks and half bonds). (Larger than the 3.9 billion they sold, presumably because of the net purchases of shares that year.)
For the 6 months ending 3/31/2021, they bought 1.2 billion of assets (mostly bonds). (This is much smaller than the 4.0 billion they sold, presumably because of the 2.4 billion of net redemptions they had to meet. Note that 2.4 billion in net redemptions is about double the 1.2 billion in rebalancing.)

Source: relevant report for 2040 fund for the time period, "Notes to Financial Statements" -> Item F "Transactions during the period in affiliated underlying Vanguard funds"
sycamore
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Re: VIG & VIGI changed benchmarks

Post by sycamore »

Morningstar has a recent article: https://www.morningstar.com/articles/10 ... ng-in-2021
They note that ETFs generally have a tax advantages over mutual funds, but there were some notable exceptions in 2021. For VIGI they say:
Vanguard International Dividend Appreciation ETF (VIGI), which carries a Morningstar Analyst Rating of Silver, expects to pay out a capital gains distribution of more than 6% of its NAV this year. This marks the fund’s first-ever such distribution since its 2016 incep­tion. VIGI’s distribution is the result of above-normal turnover (partly spurred by post-pandemic dividend cuts among some of its holdings), the inability to send some emerging-markets stocks out the door via in-kind redemptions, and strong one-directional flows. When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios.
The problem with above-normal turnover (from some companies cutting dividends) is a risk of holding dividend-focused funds.

The second explanation could also apply to other ETFs as well... if some holdings are relatively illiquid (maybe particular EM countries).

I don't quite follow the third explanation "When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios." -- wouldn't strong inflows mean an active participant wants to swap a basket of individual stocks for a newly created share of the ETF. Seems like Vanguard would be acquiring more securities rather than getting rid of them, correct?
exodusNH
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Re: VIG & VIGI changed benchmarks

Post by exodusNH »

sycamore wrote: Wed Dec 29, 2021 10:29 am Morningstar has a recent article: https://www.morningstar.com/articles/10 ... ng-in-2021
They note that ETFs generally have a tax advantages over mutual funds, but there were some notable exceptions in 2021. For VIGI they say:
Vanguard International Dividend Appreciation ETF (VIGI), which carries a Morningstar Analyst Rating of Silver, expects to pay out a capital gains distribution of more than 6% of its NAV this year. This marks the fund’s first-ever such distribution since its 2016 incep­tion. VIGI’s distribution is the result of above-normal turnover (partly spurred by post-pandemic dividend cuts among some of its holdings), the inability to send some emerging-markets stocks out the door via in-kind redemptions, and strong one-directional flows. When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios.
The problem with above-normal turnover (from some companies cutting dividends) is a risk of holding dividend-focused funds.

The second explanation could also apply to other ETFs as well... if some holdings are relatively illiquid (maybe particular EM countries).

I don't quite follow the third explanation "When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios." -- wouldn't strong inflows mean an active participant wants to swap a basket of individual stocks for a newly created share of the ETF. Seems like Vanguard would be acquiring more securities rather than getting rid of them, correct?
Right, but those they have to sell to handle redemptions from the mutual fund classes will have a lower basis and this higher capital gains.
lvm919
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Re: VIG & VIGI changed benchmarks

Post by lvm919 »

exodusNH wrote: Wed Dec 29, 2021 11:10 am
sycamore wrote: Wed Dec 29, 2021 10:29 am Morningstar has a recent article: https://www.morningstar.com/articles/10 ... ng-in-2021
They note that ETFs generally have a tax advantages over mutual funds, but there were some notable exceptions in 2021. For VIGI they say:
Vanguard International Dividend Appreciation ETF (VIGI), which carries a Morningstar Analyst Rating of Silver, expects to pay out a capital gains distribution of more than 6% of its NAV this year. This marks the fund’s first-ever such distribution since its 2016 incep­tion. VIGI’s distribution is the result of above-normal turnover (partly spurred by post-pandemic dividend cuts among some of its holdings), the inability to send some emerging-markets stocks out the door via in-kind redemptions, and strong one-directional flows. When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios.
The problem with above-normal turnover (from some companies cutting dividends) is a risk of holding dividend-focused funds.

The second explanation could also apply to other ETFs as well... if some holdings are relatively illiquid (maybe particular EM countries).

I don't quite follow the third explanation "When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios." -- wouldn't strong inflows mean an active participant wants to swap a basket of individual stocks for a newly created share of the ETF. Seems like Vanguard would be acquiring more securities rather than getting rid of them, correct?
Right, but those they have to sell to handle redemptions from the mutual fund classes will have a lower basis and this higher capital gains.
This was going to be my taxable international holding, which is why I've been keeping an eye on it lately. I read the article as well and found it strange that the change in index was not mentioned as a source for at least some of the capital gains distributions. To me it is not ideal, but is forgivable to have a large one-time distribution related to a major change like this. However, if every time there is a recession this fund ends up with large distributions due to companies cutting dividends and falling out of the index, that seems like a big problem.

If that were the case though, I would have expected the big distribution to happen last year during the worst of the economic turbulence. And why would other similar Vanguard funds have been immune to these same forces the article mentions?
You will have to give back your multiples.
sycamore
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Re: VIG & VIGI changed benchmarks

Post by sycamore »

exodusNH wrote: Wed Dec 29, 2021 11:10 am
sycamore wrote: Wed Dec 29, 2021 10:29 am Morningstar has a recent article: https://www.morningstar.com/articles/10 ... ng-in-2021
They note that ETFs generally have a tax advantages over mutual funds, but there were some notable exceptions in 2021. For VIGI they say:
Vanguard International Dividend Appreciation ETF (VIGI), which carries a Morningstar Analyst Rating of Silver, expects to pay out a capital gains distribution of more than 6% of its NAV this year. This marks the fund’s first-ever such distribution since its 2016 incep­tion. VIGI’s distribution is the result of above-normal turnover (partly spurred by post-pandemic dividend cuts among some of its holdings), the inability to send some emerging-markets stocks out the door via in-kind redemptions, and strong one-directional flows. When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios.
The problem with above-normal turnover (from some companies cutting dividends) is a risk of holding dividend-focused funds.

The second explanation could also apply to other ETFs as well... if some holdings are relatively illiquid (maybe particular EM countries).

I don't quite follow the third explanation "When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios." -- wouldn't strong inflows mean an active participant wants to swap a basket of individual stocks for a newly created share of the ETF. Seems like Vanguard would be acquiring more securities rather than getting rid of them, correct?
Right, but those they have to sell to handle redemptions from the mutual fund classes will have a lower basis and this higher capital gains.
That would make sense. But the article mentions "strong inflows" and nothing about mutual fund share class outflows. Could be that's what happened, but it's not clear from the article at least.
exodusNH
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Re: VIG & VIGI changed benchmarks

Post by exodusNH »

lvm919 wrote: Wed Dec 29, 2021 2:27 pm
exodusNH wrote: Wed Dec 29, 2021 11:10 am
sycamore wrote: Wed Dec 29, 2021 10:29 am Morningstar has a recent article: https://www.morningstar.com/articles/10 ... ng-in-2021
They note that ETFs generally have a tax advantages over mutual funds, but there were some notable exceptions in 2021. For VIGI they say:
Vanguard International Dividend Appreciation ETF (VIGI), which carries a Morningstar Analyst Rating of Silver, expects to pay out a capital gains distribution of more than 6% of its NAV this year. This marks the fund’s first-ever such distribution since its 2016 incep­tion. VIGI’s distribution is the result of above-normal turnover (partly spurred by post-pandemic dividend cuts among some of its holdings), the inability to send some emerging-markets stocks out the door via in-kind redemptions, and strong one-directional flows. When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios.
The problem with above-normal turnover (from some companies cutting dividends) is a risk of holding dividend-focused funds.

The second explanation could also apply to other ETFs as well... if some holdings are relatively illiquid (maybe particular EM countries).

I don't quite follow the third explanation "When ETFs experience strong inflows and few if any redemptions, they have fewer natural opportunities to rid low-cost-basis securities from their portfolios." -- wouldn't strong inflows mean an active participant wants to swap a basket of individual stocks for a newly created share of the ETF. Seems like Vanguard would be acquiring more securities rather than getting rid of them, correct?
Right, but those they have to sell to handle redemptions from the mutual fund classes will have a lower basis and this higher capital gains.
This was going to be my taxable international holding, which is why I've been keeping an eye on it lately. I read the article as well and found it strange that the change in index was not mentioned as a source for at least some of the capital gains distributions. To me it is not ideal, but is forgivable to have a large one-time distribution related to a major change like this. However, if every time there is a recession this fund ends up with large distributions due to companies cutting dividends and falling out of the index, that seems like a big problem.

If that were the case though, I would have expected the big distribution to happen last year during the worst of the economic turbulence. And why would other similar Vanguard funds have been immune to these same forces the article mentions?
It could be people reaching for yield and confusing stock dividends with bond coupons.
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