VDIGX vs VTSMX: Which is a better investment?

VTSMX is a total market fund. VDIGX is a Dividend Growth fund…primary a large blend (value+growth) fund. In a recent discussion that I participated on MMM foum, I did some analysis on where VDIGX is w.r.t. VTSMX and learnt some new things. Based on that, the answer is: it depends 🙂 Hey, don’t try to kill me for this…I will try and justify my answer!

Is VTSMX (total market index) better than VDIGX?

1.

Comparing VDIGX vs VTSMX in Morningstar over a 10 year period, here is what I get when I plot the growth chart: Link. According to this chart, I see two wins for VDIGX:

  • VDIGX seems to outperform VTSMX
  • VDIGX seems to have a smaller loss than VTSMX in the 2008 downturn.

2.
Comparing VDIGX vs VTSMX in Morningstar over a 5 year period, here is what I get when I plot the growth chart: Link. According to this chart, I see one win for VTSMX:

  • VTSMX seems to outperform VDIGX

Note that this is a total return comparison for a fixed amount…i.e. total return == dividends+capital gains.

3.

Just to cross verify this result, I went to Vanguard site itself and compared the two funds. The above conclusions seem to hold up. In the last 3-5 yr range, VTSMX is better; in the last 10 yr range, VDIGX is better.

4.

Past performance is not a predictor of future performance, but Wellington family (VDIGX manager Don Kilbride comes from here) has a good reputation. So, assuming there is some meaning in past performance, here is what I see:

  • In the Bull market of last 5 years, VTSMX has performed much better.
  • In the market dip of 2008, VDIGX seems much better
  • In the dip+bull market over the last 10 years, VDIGX seems to come out ahead.

Is VDIGX a better fund for a taxable account than VTSMX?

Lets me see what the answer is to the second question of VDGIX/VTSMX for a taxable account. Coming down to brute force numbers, here is the dividend distribution for the last year.

VTSMX
Distribution    Most Recent
Type            Distribution    Record Date    Reinvest Date    Payable Date    Reinvest Price    Distribution Yield    SEC Yield
Dividend       $0.25800    12/18/2014    12/19/2014    12/22/2014    $51.75    —    1.76%  B
Dividend       $0.21100    09/22/2014    09/23/2014    09/24/2014    $49.58    —    —
Dividend       $0.19000    06/20/2014    06/23/2014    06/24/2014    $49.49    —    —
Dividend       $0.19200    03/21/2014    03/24/2014    03/25/2014    $47.08    —    —
——–
$0.851
tax = $0.851 * 15% = $.12765

VDIGX
Distribution    Most Recent
Type                Distribution    Record Date    Reinvest Date    Payable Date    Reinvest Price    Distribution Yield    SEC Yield
Dividend            $0.21800    12/19/2014    12/22/2014    12/23/2014    $23.37    —    2.10%  B
ST Cap Gain    $0.07300    12/19/2014    12/22/2014    12/23/2014    $23.37    —    —
LT Cap Gain    $0.24700    12/19/2014    12/22/2014    12/23/2014    $23.37    —    —
Dividend            $0.19900    06/19/2014    06/20/2014    06/23/2014    $22.18    —    —
Dividend            $0.02300    03/20/2014    03/21/2014    03/24/2014    $21.40    —    —
ST Cap Gain    $0.01200    03/20/2014    03/21/2014    03/24/2014    $21.40    —    —
LT Cap Gain    $0.01600    03/20/2014    03/21/2014    03/24/2014    $21.40    —    —
——–
$0.788
tax = $.703*15% (div + long term cap gains portion) + .085*33% (short term cap gains)
= $.10545 + 0.02805
= $.1335

Here is my conclusion:

  • Just based off of the dividends and capital gains distribution over the last year, VDIGX pays a bit more tax, assuming short term cap gains max bracket of 33%.
  • Note that the .31% expense ratio also is a downer for VDIGX.

Based on the taxes paid over the last year, VTMSX wins this round.

I have VDIGX in my taxable account portfolio for the past year…it seems like I invested in a lossy investment, but understanding the context of my investment is probably important as well. Let me tackle that next.

Why do I invest in VDIGX and not VTSMX then?

I split my retirement into two kinds of retirement:

  • Early Retirement funded by Passive Income Streams from my taxable account
  • Real Retirement funded by my tax-advantaged accounts like 401K, IRA, etc.

Details on the funding design for my retirement are in this post.

In my tax advantaged accounts (401K and IRA), almost all the money is invested in Vanguard Target Retirement Funds. Each of the target retirement fund invests in VTSMX. So, I have enough money riding on a total stock market strategy.

For my taxable account, I invest in a different strategies, with two separate buckets/funds for each strategy…to spread the risk a bit more. The strategies I have invested in are:

  • MUNIs…VCAIX…federal+state tax free
  • Balanced fund….VTMFX…capital appreciation + national munis…federal tax free + some state tax free
  • Dividend Investing: current dividends (VHDYX) and Dividend growth (VDIGX)….100% qualified dividends (15% tax) + AMT free
  • Capital growth large and small cap (VTCLX, VTMSX)..does generate some capital gains
  • International (VTMGX)…does generate dividends…almost 100% qualified dividends (15% tax), gets some foreign tax deduction. And hopefully, some capital gains.

So, VDIGX takes the place of a dividend growth fund in my portfolio in my taxable account. The advantages that I considered before investing were:

  • 49 stocks appx…less diversification…but a longer term approach…almost a buy+hold strategy…i.e. limits short term capital gains
  • good fund family…Vanguard/Wellington
  • Considered a solid fund for a down market
  • Appx 10% is foreign market…so, some diversification across geographies (VTSMX has 0% foreign stocks)
  • A little better return than bonds, but a little less risk than capital appreciation/growth stocks.

So, would I change my VDIGX fund investment? Not now for two reasons:

  • It is a portfolio diversification for me in the dividend growth bracket…all companies in VDIGX are not in the index.e.x, 10% is foreign inv unlike VTSMX.
  • It is a less volatile fund…a good fund to keep during market dips…if you consider the last 5+ years of bull market, then a market dip is logical in the next year or two. Lets hope VDIGX earns its expense ratio 🙂

VDIGX vs VTSMX: Which is better?

VTSMX seems like a good fund to hold for its low expense ratio and the tax efficiency of an index fund. If you do not mind drops in value during a market dip and can hold it through the dip, pick VTSMX.

VDIGX is a more conservative fund, with better performance during a market downturn w.r.t. VTSMX and a comparably less performance in a bull market than VTSMX. If you want something better than a bond fund return with a little bit of additional risk, pick VDIGX.

Hope that shows that both VDIGX and VTSMX can be winners in the right circumstances.

Advertisements

4 thoughts on “VDIGX vs VTSMX: Which is a better investment?

  1. Thanks for running the numbers. I generally invest in the VTSMX fund in my taxable account for the reason you stated, low cost and tax efficiency. I do have some funds in VDIGX but I have them in my tax efficient accounts. I have really tried to limit it since my wife and I got nailed with the AMT last year, and that pretty much wiped out all gains our dividend distributions on top of our current income.

    I really like the idea of using this fund as a bond alternative.

    Like

    • Thanks for the like and for sharing your experience! Appreciate it.

      In my taxable account, I wanted to be in a position to not lose too much money. I know market timing is bad, but I am leery of putting too much money in VTSMX in my taxable account now….after 5-6 years of bull market, the only direction I see for VTSMX and any other total market fund is down. When it goes down, I will take a shot at it. Until then, I know that we will pay a bit more in taxes, but I would like to think that a large-blend proxy like VDIGX will do well in a market dip where tax loss harvesting should hopefully limit the tax damage. Lets hope I am right 🙂

      Like

  2. Pingback: Risk analysis of my Mutual Fund Investments (Beta Coefficient) | Humble FI

  3. Pingback: VDIGX….an investment decision validated. | Humble FI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s