Vanguard Launches Dividend Fund

September 26, 2005

Vanguard launches new dividend index fund and related VIPERs; curiously similar to the PowerShares offering.

Vanguard has joined the dividend party.  The indexing fund giant announced plans on Friday, September 23, to launch a new dividend-focused fund, joining the likes of Barclays Global Investors and PowerShares in the quest for the dividend-seeking dollar.  Vanguard said it would also launch a related VIPERs exchange-traded fund (ETF).

"The new Dividend Achievers Index Fund further broadens our index lineup of more than 50 offerings and provides a low-cost, passively managed choice to dividend-oriented investors," said Vanguard chief investment officer Gus Sauter.

The fund is expected to hit the market in December, although Vanguard cautions that it is still under review at the Securities and Exchange Commission.

The fund - and the ETF, in particular - could raise some hackles on Wall Street, as it is quite similar to an ETF launched by "enhanced indexing" pioneer PowerShares earlier this month. 

According to Vanguard press release, the new fund's target benchmark is something called the Mergent Dividend Achievers Select Index, which Vanguard's identifies as a "subset of the Mergent Dividend Achievers Index." Neither of those indexes appear on the Mergent Web site, but Vanguard spokesperson Michael Smith said that the fund will select stocks "essentially" from the pool of names included in Mergent's Broad Dividend Achievers Index.   That index includes all the companies on the market with a ten year history of boosting their dividends.  It also serves as the underlying for the launch PowerShares Dividend Achievers Index Fund (PFM), which was launched earlier this month.

How Vanguard will differentiate itself from this fund is as yet unclear.  The Vanguard fund will be managed by Vanguard's Quantitative Equity Group, which suggests that they will use a quantitative strategy to select the most appealing stocks from the broader index.    That puts PowerShares - the pioneer of the enhanced indexing movement - in the unusual position of running a straight index fund, while its competitor tries to steal the market with an "enhanced offering."  Given Vanguard's marketing muscle, there's little doubt that the Vanguard fund will trump the PowerShares product on the asset front.  But watching the battle should be fun.

PowerShares couldn't immediately be reached for comment.

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