https://www.barrons.com/articles/3-things-to-know-about-vanguards-new-factor-etfs-1519229946
Focus on Funds
3 Things to Know About Vanguard's New Factor ETFs
Vanguard, a longtime champion of passive investing, caused quite the stir last week when it launched a set of exchange-traded funds that are the most actively managed of their kind.
Stocks with certain characteristics, or "factors"—their size, for example, or their volatility—can do better than the broad market over long periods by producing excess returns or losing less, according to academic research. ETF shops big and small have launched their own indexed ETFs based on different factors.
Nelson's ship 'Vanguard' at the head of the British fleet, with signal flags flying, faces the French at the Battle of the Nile in Aboukir Bay during the Napoleonic Wars. Photo: Rischgitz/ Stringer
Altogether, the 176 U.S. factor ETFs account for $73 billion in assets, according to research firm XTF.com. Vanguard's ETFs stand out by resembling actively managed funds while delivering index-fund-like low prices and diversification. Here are all of them:
Vanguard U.S. Minimum Volatility ETF (VFMV)
Vanguard U.S. Momentum Factor ETF (VFMO)
Vanguard U.S. Value Factor ETF (VFVA)
Vanguard U.S. Liquidity Factor ETF (VFLQ)
Vanguard U.S. Quality Factor ETF (VFQY)
Vanguard U.S. Multifactor ETF (VFMF)
Antonio Picca, head of Vanguard's factor-based strategies, told Barron's that the firm's approach to factor ETF construction is unique in a number of ways. For one, it tends to hold more stocks than the 150-200 one usually sees in other products. The Vanguard U.S. Minimum Volatility ETF holds the lineup's fewest—300—due to the nature of that strategy. The Vanguard U.S. Liquidity Factor ETF, which holds the most, has 1,000 stocks.
The second thing is that these ETFs hold stocks across the spectrum of small-cap, mid-cap, and large-cap companies, unlike many of their rivals. "We cover the market capitalization spectrum for diversification, but also for opportunity," Picca explains. "There is overwhelming empirical research that says these factors delivers stronger premiums within small-cap stocks."
In addition, Vanguard's factor ETFs do not use sector caps. In other funds, that can lead to outsize sector bets with 20% of assets in utilities, for example. But because Vanguard uses a holistic approach to construction—carefully assessing how the factors are being represented in stocks—it does not lead to "extreme sector deviation," Picca says.
That holistic approach makes Vanguard's products more appropriate as a core holding than other ETFs that rank a universe of stocks based on a single factor and cull the top or bottom, says Alex Bryan, Morningstar's director of passive strategies.
Vanguard is also trying to keep its pricing edge. Its single-factor ETFs charge 0.13% in annual fees, compared to an average 0.27% charged by rivals' similar products, according to Morningstar. "Fees still matter for these funds, and the cheaper ones have a higher probability of success," says Bryan.
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