The Key Issues in Picking an Active or Passive Fund

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For investors who prefer to load up on dividends through mutual funds rather than building their own portfolios, there are two basic options to consider: actively managed funds or index funds.

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It is important to get down a bit to understand these perspectives. “No two equity income strategies are created equal,” says Ben Johnson, director of global ETF research at Morningstar, noting that the strategies used by active managers or the index on which a passive fund is based is understandable. is important.

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Dividend

handful of dividend funds baron’s The active and passive dividends selected for this story offer several options for investing.

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Consider the actively managed $54.4 billion Vanguard Dividend Growth (ticker: VDIGX) and the indexed $66.5 billion Vanguard Dividend Appreciation Exchange-Traded Fund (VIG).

Both use the S&P US Dividend Growers Index as their benchmark. But actively run Dividend Growth under the supervision of longtime manager Don Kilbride, most recently 42 stocks, while the Dividend Appreciation ETF, with 268 holdings, offers much broader exposure to dividend-paying stocks.

The former has an annual expense ratio of 0.26% and the ETF, 0.06%. Actively managed funds have reported a 15-year annualized return of 10.7% against the ETF’s 10.2%.

The mutual benchmark of the fund includes companies that have increased their payouts for at least 10 consecutive straight years. However, the index excludes 25% of eligible companies with the highest yield. Stocks with very high returns can be value traps and vulnerable to dividend cuts.

Of those two portfolios’ recent top 10 holdings, only three securities overlapped: Johnson & Johnson (JNJ), which yields a 2.6% return; UnitedHealth Group (UNH), 1.3%; and Microsoft (MSFT), 0.7%.

Daniel Wiener, president of Advisory Investments and a longtime follower of Vanguard’s fund, argues that none of these portfolios are “equity income vehicles,” calling them “portfolios of stocks that increase their dividends, especially those with high yields.” No stock.”

According to Morningstar, the active fund’s 12-month yield was recently at 1.4%, compared to the ETF’s 1.55%. Although those yields exceed the S&P 500 index’s 1.3%, they aren’t particularly high, especially for someone looking for more income.

There are many options for such investors. Here are two:

According to Morningstar, there is an actively directed $51.1 billion Vanguard Equity Income Mutual Fund (VEIPX), with a 12-month yield of 2.24%. There’s also the $40.5 billion Vanguard High Dividend Yield ETF (VYM), which yields 2.74%. The ETF has an annual expense ratio of 0.06%, compared to 0.28% for equity earnings.

Both the funds are benchmarks of the FTSE High Dividend Yield Index. There are 410 holdings in the ETF, which is more than double the nearly 190 for Vanguard Equity earnings. The latter fund has a 15-year annualized return of 9.1%, compared to 8.7% for ETFs.

Among the top five holdings in these two funds, there is a lot of overlap, which includes Johnson & Johnson; JPMorgan Chase (JPM), which returns 2.4%; Bank of America (BAC), 1.8%; and Procter & Gamble (PG), 2.3%.

There is not necessarily a right choice between active and passive dividend funds here. Much of this depends on what the investor is comfortable with – betting on a more broad set of stocks or a smaller portfolio based on the portfolio manager’s best ideas.

write to Lawrence C. Strauss at [email protected]

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