VIG vs. VYM: Which Vanguard Dividend ETF Is Better Positioned for a Weakening Economy?

As global economic indicators point to a potential slowdown in 2026, investors are increasingly prioritizing defensive positioning in their portfolios. Two of Vanguard's flagship dividend ETFs-VIG (Vanguard Dividend Appreciation ETF) and VYM (Vanguard High Dividend Yield ETF)-offer distinct approaches to dividend investing, but their performance in risk-off environments suggests divergent strategic advantages. This analysis evaluates their historical resilience, sector allocations, and dividend sustainability to determine which is better suited for a weakening economy.

Historical Performance: VYM's Short-Term Resilience vs. VIG's Long-Term Growth

While VIG has historically delivered stronger annualized returns over a 10-year period 9.93% vs. VYM's 8.60%, its performance during acute market downturns tells a different story. During the 2022 market selloff, VYM declined by 6.49%, significantly outperforming VIG's 15.29% drop. Similarly, VYM's maximum drawdown of -56.98% during the 2008 financial crisis was less severe than VIG's -46.80%. These figures highlight VYM's ability to act as a buffer in volatile environments, a critical trait for investors seeking downside protection.

The divergence stems from their investment philosophies: VIG focuses on companies with a 10-year history of dividend growth, often in resilient sectors like technology and healthcare. While these sectors tend to preserve capital during downturns, they lack the income-generating potential of high-yield stocks. VYM, by contrast, prioritizes above-average dividend yields, often in sectors like utilities and energy, which historically exhibit lower volatility and consistent cash flows.

Sector Allocations: Defensive Sectors vs. Growth-Oriented Exposure

VIG's sector allocations reflect a growth-oriented bias, with significant weightings in technology 15.61% in Q4 2025 and healthcare 11.53%. These sectors, while innovative, are sensitive to interest rate hikes and economic uncertainty. In contrast, VYM's portfolio is anchored by financials 20.37% and energy 8.64%, sectors that historically provide stable cash flows and are less prone to earnings compression during recessions.

Financials, for instance, benefit from higher interest rates in a tightening monetary environment, while energy companies often maintain robust cash flows due to inelastic demand for commodities. This sectoral tilt positions VYM to generate consistent income even as growth stocks falter. Meanwhile, VIG's exposure to cyclical sectors like technology could amplify losses during a downturn, despite its focus on dividend growth.

Dividend Sustainability: Yield vs. Stability

VYM's higher yield 3.11% as of November 2025 offers immediate income, which is particularly valuable in a risk-off market where capital preservation and cash flow are paramount. However, this yield comes with trade-offs: VYM's holdings often lack the long-term dividend sustainability of VIG's constituents. For example, energy and utility stocks in VYM may face regulatory or demand-side pressures during recessions, potentially leading to dividend cuts.

VIG, with a yield of 1.92%, prioritizes companies with a proven track record of increasing dividends, ensuring greater resilience in maintaining payouts. Yet, its lower yield may leave investors wanting in a scenario where income generation is the primary objective. The key insight here is that VYM's yield can act as a buffer against principal erosion, a critical consideration in a weakening economy.

Q4 2025 Sector Shifts and Macroeconomic Implications

Recent index reconstitutions in March 2025 have further amplified these differences. VIG has increased its exposure to financials and healthcare, sectors that align with a low-growth, high-inflation environment. VYM, meanwhile, has maintained its focus on energy and utilities, which are expected to benefit from structural tailwinds such as energy transition policies and infrastructure spending as shown in the analysis.

As of November 2025, global dividend trends also favor income-focused strategies. Total payouts have risen by 6.5% year-to-date, but energy sector dividends remain vulnerable to macroeconomic shocks. This underscores the importance of balancing yield with sustainability-a challenge VYM navigates more effectively than VIG.

Strategic Recommendation for 2026

In a weakening economy, defensive positioning should prioritize income stability and sectoral resilience. While VIG's long-term growth potential is compelling, its exposure to volatile sectors and lower yield make it less suited for a risk-off environment. VYM's higher yield, combined with its focus on financials and utilities, offers a more robust hedge against market declines.

For investors seeking to preserve capital and generate consistent cash flow in 2026, VYM is the more compelling buy. Its value tilt and high-yield profile align with the defensive imperatives of a slowing economy, making it a superior choice for those prioritizing income over growth in uncertain times.