Over the past few years, you could simply invest in the S&P 500 and enjoy strong double-digit annual returns. Tilt more heavily toward megacap growth, and you likely did better. There wasn't a big need to figure out what style, factor, or strategy would lead to outperformance. You could invest in the broad U.S. stock market and do well.
But this year has marked a big change. Tech is no longer leading. Most major sectors are beating the S&P 500 year to date. Many styles and strategies that have gone ignored for years are suddenly looking attractive again.
That goes for dividend stocks as well. The Vanguard Dividend Appreciation ETF (VIG 1.31%) is up nearly 4% year to date compared to a flat return for the Vanguard S&P 500 ETF. Its tilt toward quality and value has been a tailwind as the market continues rotating away from expensive tech stocks.
Let's break down how this ETF looks for the rest of 2026.
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Why the Vanguard Dividend Appreciation ETF works in 2026
This ETF invests in more than 300 U.S. stocks that have a 10-year-plus track record of annual dividend growth. Real estate investment trusts (REITs) are excluded, as are the top 25% highest yields from the eligible universe. That creates a portfolio of large, durable, cash-rich companies that have mature business models and are able to continue rewarding shareholders over time.
As we've seen over the past several years, there was little desire for the S&P 500's 1% to 2% yield when large-cap tech and growth stocks were returning 15% or more per year. That changed in 2026. Investors have grown more cautious about the U.S. economic outlook and the Federal Reserve's willingness to cut interest rates later this year. Valuations are already high, and without the potential catalysts to keep these stocks pushing higher, investors have transitioned over to more defensive, value-oriented areas of the market.
NYSEMKT: VIG
Key Data Points
That's worked well for dividend ETFs, whose portfolios are usually comprised mostly of non-tech stocks. Will this rotation be sustained through the remainder of this year? Given that so many sectors and styles are outperforming the S&P 500 right now, along with Treasuries, which have only recently gotten going, the backdrop is certainly favorable. Anytime the market expects the economy and jobs market to slow and is less willing to target more expensive stocks, that's a good thing for dividend stocks.
What to watch out for
I'm not a fan of the Vanguard Dividend Appreciation ETF's market cap-weighting strategy. It makes the largest qualifying stocks the biggest holdings in the fund regardless of dividend quality or history. The fund's current top three holdings are Broadcom, Microsoft, and Apple -- all stocks with less than a 1% yield.
That strategy results in this ETF having a much larger tech allocation (currently 26% of the portfolio) than most other dividend ETFs. That elevated exposure to a sector that's now very much out of favor makes the fund vulnerable to a deeper pullback.
Overall, the Vanguard Dividend Appreciation ETF is filled with companies built to withstand more challenging environments. Its 1.6% yield won't necessarily get income investors excited, but it could beat the S&P 500 this year on total returns.
