An investor who put $100,000 into VYM at the end of 2021 finished the next several years ahead of the same investment in VIG, despite VIG's stronger rebound after 2022. The result illustrates sequence-of-returns risk: an early loss can permanently reduce the dollars available to compound or fund withdrawals.
One bad year created the gap
The source calculation shows VIG falling about 10% in 2022 while VYM was nearly flat. By year-end, the VIG balance was roughly $9,300 lower. VIG then outperformed from the start of 2023, but its percentage gain applied to a smaller base.
The effect becomes more severe when an investor withdraws cash. Selling shares after a large decline locks in part of the loss and leaves fewer shares for the recovery. That mechanism, not a claim that VYM is always safer, explains why the start date mattered.
Portfolio design drove the difference
VIG's dividend-growth screen carried more exposure to technology and other long-duration growth companies. Those stocks were hurt when the Federal Reserve raised rates rapidly in 2022. VYM's value tilt and larger exposure to financial and energy companies held up better in that specific environment.
The next cycle could reverse the result. Falling rates, weaker energy prices or a credit event could favor VIG's quality-growth profile over VYM's higher current yield. Vanguard's longer-term data show that leadership has changed across five- and ten-year windows.
Income is only one withdrawal source
VYM's higher yield can reduce the number of shares a retiree must sell, but dividends are not free money. A distribution reduces the fund's net asset value, and taxable investors may owe tax even when they do not need the cash. A total-return plan can combine distributions with planned sales while keeping a cash reserve for weak markets.
What investors should watch
Before retirement, stress-test the first five years of withdrawals under different rate and equity scenarios. Compare drawdowns, not only average returns, and consider whether the portfolio can fund spending without forced sales.
BTI's bottom line
VYM's 2022 advantage was valuable for an investor already drawing income. The broader lesson is to manage early-retirement sequence risk, not to assume that the higher-yield ETF will always lead.