What is VIGI? (Pros, Cons, and Strategies)

If you're considering diversifying your investment portfolio with a focus on international markets, VIGI might be the ETF you’re looking for. Vanguard International Dividend Appreciation ETF (VIGI) is popular among investors who are interested in long-term dividend growth from established companies outside the U.S. Today, we'll delve into what VIGI is, and discuss its advantages, disadvantages, and potential investment strategies.

What is VIGI?

VIGI is an ETF offered by Vanguard that focuses on international companies with a strong track record of dividend growth. VIGI stands for Vanguard International Dividend Appreciation ETF.

VIGI tracks the NASDAQ International Dividend Achievers Select Index, which includes companies from developed and emerging markets that have demonstrated the ability to grow their dividends over time.

Key Features of VIGI

• International companies with at least seven consecutive years of dividend growth
• Companies with a market cap of at least $2 billion
• Excludes companies that are REITs or part of the infrastructure sector

After screening for the criteria, the index includes companies with a strong history of increasing their dividends, providing investors with an opportunity to benefit from potential dividend growth and capital appreciation on a global scale.

VIGI Composition

VIGI includes prominent international companies such as Nestle (NSRGY), Roche Holding (RHHBY), and SAP SE (SAP). The ETF spans across various sectors, ensuring a diversified portfolio and reducing exposure to any single industry or market. This diverse composition makes VIGI appealing to those who seek international exposure while focusing on dividend growth.

Pros of VIGI

International Diversification

One significant advantage of VIGI is that it offers international diversification, allowing investors to spread their risk across various countries and economies. This means that your investment is not solely dependent on the economic performance of the United States.

Focus on Dividend Growth

VIGI emphasizes companies with a history of growing dividends. This focus tends to identify financially robust companies that are likely to continue appreciating dividends, providing a potential for increasing income over time. This can be particularly beneficial for long-term investors looking for a steady stream of income.

Low Expense Ratio

VIGI features a relatively low expense ratio of 0.15% per year. Vanguard is known for offering low-cost funds, and VIGI is no exception. Over the long term, a low expense ratio can significantly increase net returns by reducing investment costs.

Cons of VIGI

Currency Risk

Investing in international markets exposes investors to currency risk. Fluctuations in currency exchange rates can impact the returns. This factor can be particularly unpredictable and adds a layer of risk that U.S.-centric ETFs like SCHD do not have.

Lower Dividend Yield

Although VIGI aims for companies with a history of increasing dividends, its yield tends to be lower compared to some other high-dividend ETFs. For instance, while VIGI's dividend yield hovers around 2-3%, other high-dividend ETFs might offer yields of over 4-5%.

Exposure to Emerging Markets

While the inclusion of emerging market companies can provide additional growth potential, it also introduces volatility and risk associated with political instability, economic fluctuations, and less stringent regulatory environments.

VIGI Investment Strategies

VIGI may best suit investors looking for long-term growth and income diversification outside the U.S. Its focus on dividend appreciation from international companies makes it an attractive choice for a balanced, globally diversified portfolio.

Long-term Investment Strategy

Given VIGI’s emphasis on dividend growth and international diversification, it is best suited for long-term investments. A horizon of 10 years or more can help investors capitalize on the compound effect of dividend reinvestment and the potential for capital appreciation. Long-term investors can benefit from the growth of international companies while mitigating risks through diversification.

Regular Investment and Dividend Reinvestment

To take full advantage of VIGI, consider a regular investment strategy combined with dividend reinvestment. By consistently investing a fixed amount and reinvesting dividends back into VIGI, you can benefit from the compound growth effect. This strategy is particularly beneficial for retirement planning and building a substantial investment portfolio over time.

Complementary Holding

For investors already holding U.S. equities or ETFs, VIGI can serve as a complementary investment. Its international scope can provide balance against domestic market volatility and help achieve better overall portfolio diversification.

Conclusion

VIGI offers an appealing option for investors seeking international exposure with a focus on dividend growth. While it comes with its own set of risks and a relatively lower yield compared to other high-dividend ETFs, its strength lies in providing a low-cost, diversified means of benefiting from established international companies' growth. Adopting long-term strategies and leveraging the compound effect of reinvested dividends can enhance the potential returns from VIGI, making it a valuable component of a diversified investment portfolio.