The behemoth fund group Vanguard Asset Management has launched four new global factor investing ETFs, based on the value, liquidity, momentum, and low volatility return premiums.
My thanks to reader Snowman for tipping us off about these new ETFs.
I haven’t seen an official press release on Vanguard’s UK website, but the factor ETFs are already being talked about in the investing media.
They are also listed on Vanguard’s UK index fund and ETF page:
Vanguard’s four new factor ETFs listed on its website. Today.
Never mind the potential downsides – feel those low total expense ratios!
Here’s how Vanguard’s factsheets describe its new ETFs1:
Vanguard Global Liquidity Factor UCITS ETF
The Fund pursues an actively-managed investment strategy.
The Investment Manager’s quantitative model implements a rules-based active approach that aims to assess the factor exposures of securities, favouring equity securities which, when compared to other securities in the investment universe, have low trading volumes and other measures of trading liquidity, including lower trading share and dollar volumes, based on percentage turnover, and price impact.
Vanguard Global Minimum Volatility UCITS ETF
The Fund employs an active management strategy and will seek to achieve its investment objective by investing primarily in equity securities that are included in the FTSE Global All Cap Index.
The Investment Manager’s quantitative model evaluates the securities in the Benchmark by reference to characteristics designed to measure their exposure to a variety of factors that drive a security’s volatility such as industry sector, liquidity, size, value and growth. The model also assesses the interaction between these factors and their impact on the overall volatility of the portfolio.
The Fund will generally seek to hedge most of its currency exposure back to the U.S. dollar to further reduce overall portfolio volatility.
Vanguard Global Momentum Factor UCITS ETF
The Fund pursues an actively-managed investment strategy.
The Investment Manager’s quantitative model implements a rules-based active approach that aims to assess the factor exposures of securities, favouring equity securities which, when compared to other securities in the investment universe, have relatively strong recent past performance.
Past performance will be assessed in terms of both non risk-adjusted and risk adjusted return, over the shorter (approximately 6-months) and intermediate (approximately 12-months) periods prior to the acquisition of the securities by the Fund.
Vanguard Global Value Factor UCITS ETF
The Fund pursues an actively-managed investment strategy.
The Investment Manager’s quantitative model implements a rules-based active approach that aims to assess the factor exposures of securities, favouring equity securities which, when compared to other securities in the investment universe, have lower prices relative to their fundamental measures of value (which measures may include price-to-book or price-to-earnings ratio, estimated future earnings and operating cash flow).
Actively up and at ’em
What jumps out from these rather geeky descriptions is that they are all actively-managed ETFs, rather than index trackers.
This isn’t new territory for Vanguard. Despite its reputation among passive investors for cheap index tracking funds, the group has run active funds for decades. (Vanguard does emphasize low costs with its active products, too).
According to Alex Lomholt at Vanguard:
“Vanguard has chosen to take an active approach to managing these funds by using quantitative models to select stocks and build a portfolio that targets the desired factor whereas other managers may track an index to implement a factor-based strategy.
Investors need to be confident that the methodology chosen will deliver their desired factor exposure to meet long-term investment objectives.”
Of course, clued-up Monevator readers know that being confident that a product can deliver the exposure you want is one (important) thing.
But there’s no guarantee that even properly-implemented return premiums will outperform in the future.
Indeed none other than Vanguard’s founder Jack Bogle once said:
If you look at the long sweep of data going back into the ’20s – and, of course, data are suspect – but there are long periods, 20 years or so, when large do better than the small and when growth does better than value.
In the long run, it is correct, if you believe the data, that value does better than growth and that small does better than large.
But I’m of the school that says, if that is proven – and it is, I think, a little bit in the marketplace – if it is proven to be the case, then people will bid up the prices of value stocks and bid down the prices of growth stocks until they reach an equilibrium and then future returns will be the same.
So, I wonder first about the data; second, about trying to rely on something that happened in the past as a forecast of the future.
So, I don’t think you need to do it. It’s not going to be awful.
The fundamental thing: It’s all the same stocks; it’s just the different weights.
There is nothing awful about [factor-based funds].
But I would rather bet with the whole market and be guaranteed of my share of the return.
So who is right, Bogle – or for that matter our own contributor Lars Kroijer – or the academics who believe the factors will go on to beat the market in the future?
You pays your money and takes your choice – but at least you don’t pays so much money with Vanguard’s low-cost active ETFs, compared to say a factor-chasing hedge fund.
You can use the links at the top of the article for my co-blogger’s articles on the different risk factors, and on how they might give you an edge.
In addition, here’s some further reading:
- A quick introduction to the return premiums
- An good interview about factor investing [Video]
- Why the return premiums flatter to deceive
- Why Lars Kroijer believes you should stick with market cap trackers
- My bold, and I’ve edited out the blurb about the investing universe, which in every case but low-volatility is primarily the FTSE Developed All Cap Index and the Russell 3000 Index. [↩]
Interesting they’re launching these now… With costs that low, they’re cheaper than many passive funds! Probably worth a look
Wow, I beg Bogle really these! He hates that Vanguard does ETFs at all, let alone actively managed factor-seeking ETFs.
What is Vanguard’s end game? Given that it has no outside shareholders, why is it looking to constantly grow? If it’s to lower the fees for investors then okay, but I’m sure Bogle would agree that tiny savings on fees (which is all the extra savings are going to be from now on) are perhaps hugely outweighed by the losses that investors will incur by chasing whatever fad (i.e. factor investing) is in vogue today.
Personally I think it’s a shame. I would have preferred to see Vanguard stick to its bread and butter of low cost simple index’s for the average Joe for all eternity, but now it seems to be dreaming up whatever whizzy cocktail of products it can to fuel growth, just like most of the other big asset managers.
John
These are interesting additions, no doubt. But to the everyday man in the street, they muddy the waters slightly when deciding on an investing strategy with Vanguard UK.
Still, gotta love those low charges, though.
@UK value investor
I have a few customer owned organisations at the edges of what I do
You have to think of Vanguard as being kind of like a big building society
Its notionally owned by its fund holders but really the management are completely unanswerable to anybody, avoid most financial disclosure and they can pay themselves more as the organisation gets bigger
Vanguard is only a force for good in that it drives charges down hugely in every segment of the fund industry it enters
Nevertheless that is a huge service to people like us
If they can charge 0.22% on these, I wonder why they still have to charge 0.25% for VWRL 🙁
@Neverland:
You are wrong about the governance of Vanguard
https://about.vanguard.com/vanguard-proxy-voting/corporate-governance/
These seem different to the iShares Factor ETFs which appear to track indexes?
@algernon
I agree, it does seem a bit strange that an active strategy is going to cost less than a fully passive one. Perhaps a Christmas present is in the offing from Vanguard on its VWRL and Lifestrategy funds?!!
@Neverland, I agree. I was going to mention the size/CEO salary ratio, but didn’t. I guess there’s an element of that, plus empire (ego) building of course.
Fama and French are pretty happy that the min vol and value factors (and perhaps momentum) are real over the long term so it makes sense to index them. But we have to suffer the infuriating arrogant stupidity and cupidity of UK finance professionals. These etfs show everything wrong about UK finance professionals when they get their hands on something.
First, *these factors should be indexed*, not open to arbitrary messing around by someone who thinks he’s a quantitative active manager. Instead we have this fantasist at Vanguard who has ‘has chosen to take an active approach to managing these fund by using quantitative models to select stocks and build a portfolio that targets the desired factor’. This is meaningless twaddle. There is only one way to invest properly in these factors: use the rule on which the research showing these factors outperform is based. Such a rule gives you an index. End of story.
Second, *they’re being hedged to US dollars*. The sheer stupidity of this is unbelievable. The point of factor investing is to buy the market factor, not buy the market factor hedged to your home or any other currency. Hedging removes one of the main protective factors of buying the market factors. The idiots have done the same to all their bond index funds as well (hedged to sterling). What is wrong with these people? These blunders make these worthless.
Vanguard say ‘Investors need to be confident that the methodology chosen will deliver their desired factor exposure to meet long-term investment objectives.’ Indeed! And one thing investors can be sure of is that Vanguard UK’s factor ETFS will NOT ‘deliver their desired factor exposure to meet long-term investment objectives’. People should stick to Ishares indexed factors if they want to take on these factors.
@clay — Thanks for you comments. I don’t mind your full and frank views on the products themselves (in fact, I welcome it) but can you (and others) please try not to call people/companies “idiots” etc?
Firstly, I don’t have a legal fund.
Secondly, in my experience of two decades of Internet commentary that sort of approach does not usually help along a constructive conversation.
On balance I’ll leave this up, I can see you’re not meaning anything malicious, you’re just using a bit of rhetoric, but for future reference for you/others.
Finally, I am not sure I agree about hedging substracting from the value of factor exposure, but it’s been a while since I read deeply on it. My working understanding is that it is the factor that is (potentially) additive to returns, not some additional currency risk, which I presume academic researchers would have backed out (otherwise all factors are “factor X/Y/whatever + varying currency risk”).
I could be wrong though. Links to data appreciated. 🙂
p.s. I am certain there’s evidence (e.g. Credit Suisse Yearbook 2012) that it makes sense to hedge overseas bond exposure (because of their typical shorter horizons and lower returns) to your home currency — but not to hedge equities — so your point there is at the least contentious. 🙂
Here’s F and F’s five factor model http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2287202
Asness summarising research on momentum http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435323
As I understand it researchers don’t hedge out the currency risk because the premium measured is relative to each market taken in its own terms, not hedged to some other currency. But in any case, the point about not hedging factors just follows from the point about not hedging indexes in general. You want to buy the *whole* market, or if you accept the factor point, then you are trying to buy a return that is *whole* market plus factor premium, where the base of this is global. Your contributor Lars makes this very clear in his argument that the whole market is the global market, not bits of it, and don’t bet on anything else unless you know more than the market. (For that reason the skepticism about factors you discussed on your page is entirely warranted–as you said, very hard to capture the theoretical premium.) If you hedge to a currency then you are making a bet on that currency. What do you know better than the whole market does that makes betting on that currency a good idea forever? What about going for whole market plus factor premium makes any difference to that?
On the point about being rude about the UK finance profession, all of this is fair comment. Stating truths about their character defects is something that should be done regularly and loudly in the hope that calling out their shameful behaviour might moderate it. If they don’t improve at least we have the consolation having told them what is wrong with them. You may be right that they are not idiots: rather, they are treating us like idiots and getting away with it. That is contemptible but, yes, perhaps not stupidity. Only cupidity. Of course, if they don’t believe what they say but merely think we are stupid enough to fall for it, that would make them liars.
I should have addressed the issue about hedging bonds. The problem here is that we should distinguish bonds as short to medium term cash on hand and bonds as part of long term investment portfolio. Perhaps the former should be hedged, but again, for the former your contributor Lars point applies: if you have a currently good currency then just hold this in your own government’s bonds. In fact in the UK you should just put it in the current accounts that pay high interest and play the cash merry go round. So either way the only point of having other bonds is because they are part of the whole market you are trying to buy and the point about not betting on currencies applies to them no less than to equities.
Finally, on Vanguard governance, as far as I have been able to find out only Vanguard US investors are owners of Vanguard and thereby have any company profits returned to them in their investments. Vanguard UK investors are not owners and profits from Vanguard UK go to Vanguard US investors.
@clay — Thanks for the follow-ups on hedging and factors, I’ll have a read over the weekend. Would also welcome other comments from knowledgeable readers.
We’re going to have to agree to disagree on the rudeness front.
The Internet is full of people shouting abuse (e.g. the comment sections of national newspapers, and it makes them unreadable to most people, including me.)
In addition, if you say that some particular person/company is some unflattering insult, that is libel. We can both be taken to court and sued, and have to prove what you said was true. I could be shut down due the legal costs/consequences.
Saying “this product is flawed” is fine (if you can back your opinion up, technically speaking, but I think in practice the law and the companies are more forgiving here, although you do get the odd litigious one who sues everyone).
Again, I’ll leave the paragraph in because you’re talking generally about the financial services profession, but I am going to have to start deleting soon.
Incidentally, we agree and I am quite well aware of the need to highlight the flawed incentives / products / advice retail investors have been offered by the financial services industry for decades — that is why I launched this blog nearly 10 years ago and have been writing 2-3 times a week since then about it! 🙂
A colourful metaphor is one thing, and we use them. Flat out insulting / claiming specific people/companies have character defects or malicious intent is another, at least around here, and I’m the editor around here. 🙂
Plenty more Internet out there if you don’t approve or can’t post comfortably within that stricture. 🙂
This is fascinating stuff!!
Something to think about.
An idle thought crosses my mind.
If an investor were to diversify and buy some of each, would he perchance end up back with a cap weighted index fund?
Suspect not, but where would he be?
Hi magneto I actually wondered same thing as you on whether putting these 4 funds together .. You’d end up with a global tracker .. Be interested to know views on this.
Any details? Who are the managers of the funds? What are the characteristics (P/E; P/B, country exposure etc.) of the new funds? How many stocks are there in a fund?
Wonder how much the Value one will yield in dividends compared to VHYL (World High Yield, which is currently yielding about around 3%, eg less than the FTSE100). At the moment I hold VHYL and VWRL, among several others picked up over time. If its anything like them it will be at least 40-50% US stocks.
@The Investor. If you ever get into any bother when it comes to libel accusations, give me a shout. I’ve a bit of experience when it comes to those legal matters.
I think general analysis of the factors often finds that each one takes turns to randomly outperform the others, so equal-weighting each factor and rebalancing once a year would seem a sensible way to do it. I remember Reformed Broker mentioning this ages ago
David,
iShares have the FactorSelect ETF (IFSW) which combines four factors (Value, Momentum, Size, Quality). Unfortunately the TER is 0.5%, and both my providers (HL & II) don’t offer it yet. HL said: ‘Unfortunately iShares FactorSelect MSCI World UCITS ETF (IFSW) does not currently settle in Crest and we are therefore unable to trade them.’
These new Vangaurd ones aren’t on HL or II yet either. I wonder how long it normally takes for new ETFs to be available from the brokers?
I tell a lie. The Vanguard ones are showing on II, but not HL.
@ Clay – where have you read that Vanguard’s factor ETFs are hedged to the US dollar? I can’t see that in any of the literature, yet hedging is even mentioned in the names of the Vanguard bond products that are hedged.
The base currency is in dollars but then so are most global passive investing products (apart from the ones based in euros). I haven’t found a single global ETF / fund with a base currency in pounds from any provider. Plenty are denominated in pounds cos consumers like that sort of thing but the base currency is inevitably dollars / euros.
It would be very odd not to say pointless to offer UK investors a product hedged to the dollar.
Also worth mentioning that Fama and French’s own fund shop – Dimensional Fund Advisors – provides factor based products that do not index.
Their managers also trade actively but reputedly in such a way as to reduce trading costs that could otherwise wipe out the gains made from a long-only factor portfolio.
I don’t have a problem at all with Vanguard actively managing these products as long as they’re using a clear set of rules to govern their investing strategy and as long as management fees are minimal.
I’d agree they haven’t provided enough guidance on the first point (though neither have rival indexed products in my view) yet, but they’re already succeeding on the fees front.
Regardless, I won’t invest in a new product until I can see what’s actually in it and how it measures up versus rivals on the fundamentals e.g. price-to-book, no of shares, median market cap etc.
@ John & MyRich – I’m very happy that Vanguard have created factor ETFs for the UK. Their US line-up has long had similar products. I don’t see this as betraying heritage, this is about expanding the UK line-up with products for which there is a need and demand.
Personally, I think I’ll be better diversified with investments that differentiate by factor than by geographical area – pretty much my only choice up until relatively recently.
@ Magneto – theoretically yes, because the factors are subsets of the total market, you could end up with a combo that just returns the market for a higher cost! But… the research I’ve read suggests a portfolio of low correlated factors has the potential to improve expected returns and lower volatility. No guarantees mind! I’ve written more about it here:
http://monevator.com/how-to-build-a-risk-factor-portfolio/
Most think it’s better to combine factors in one fund rather than invest in multiple funds which may be pulling in different directions. For example, it’s better to be in a fund that buys quality firms at a cheap price than be in a quality ETF and a value ETF and incurring the cost of the quality ETF ditching a stock at very point where the value ETF is acquiring it.
This plays into Algernond’s mention of iShares FactorSelect ETF which combines a good blend of factors in my view, but I haven’t had a chance to properly examine it yet.
@ Gregory – Vanguard haven’t published those details yet and neither have Morningstar. I’d give it 6 – 12 months to settle down.
The Accumulator: I clicked on this fact sheet https://www.vanguard.co.uk/uk/portal/loadPDF?country=uk&docId=6288. Third bullet point on the right it says its hedging back to US dollars.
By the way, I don’t know exactly what DFA does. The mere word ‘index’ is not the central issue but whether the fund is run by the rule that was used for the research. To be clear about what I mean by the difference between an index and quantitative twaddle: The crucial issue is to have an algorithm that given the raw data on stocks spits out the list to own. No human intervention. The algorithm is written to implement the definition of min vol or value that the research used. In the case of min vol that is not so hard: e.g. take the ftse developed all cap, choose the thousand with least volatility in the last year. But that is not what vanguard are doing. For their min vol they say
“The Investment Managerís quantitative model evaluates
the securities in the Benchmark by reference to
characteristics designed to measure their exposure to a
variety of factors that drive a security’s volatility such as
industry sector, liquidity, size, value and growth. The model
also assesses the interaction between these factors and
their impact on the overall volatility of the portfolio. The
Fundís investments will be selected based on the output of
this model”
This is too clever by half: they are not choosing the actually least volatile but are trying to predict which shares will be least volatile. That is exactly what the research is not based on because any research based retrospectively is cheating with hindsight. I.e. if the research had been doing 1 year rolling intervals and took, at the end of the year, the 100 least volatile and counted it as if it bought them at the beginning of the year that would be hindsight. It is only meaningful if you take those 100 and own them for the following year and get a premium on that basis. After all, if you could do it the hindsight way there is one winning strategy that will massively outperform everything. Find the stock that did best in the year and then count it as if you bought it at the beginning of the year.
And the worst bit is the last bit, because they don’t even use what the model decides but the human intervenes at the last moment and does the choosing. The Telegraph reports the latter as “Active ETFs have human intervention so a bit of common sense can be applied to exclude certain shares”. Euch. The last thing I want.
So the min volatility ETF is the only one hedged in US dollars. As stated, this is done to minimise volatility, which makes sense given the ETF is based in US dollars. Still, the results a UK investor experiences will be influenced to some extent by the £ vs the $.
Algorithm vs human – all index trackers have managers. Check out their prospectuses and see how much discretion they have. It’s eye-opening. Most exclude certain shares on one basis or another – generally to avoid excess cost. Next layer down: the index. Often influenced by a panel of humans, especially an index like the S&P 500.
Maybe I haven’t properly understood your criticism of Vanguard’s explanation for the min vol ETF but you seem to be criticising it on two fronts:
1. for trying to predict low vol equities
2. for using hindsight to establish low vol equities
This can’t be what you mean because there’s nowhere else to go after that. Sorry for being slow but are you criticising them for 1 or 2?
Could link to someone who is getting it right and the rules they use?
Based on what Vanguard have released so far, I certainly can’t come to any firm conclusions about how their min vol model works. Only the momentum one seems clear at the mo.
All factor research is based on hindsight, i.e. identifying stocks with characteristics that have outperformed in the past. There is no guarantee that stocks with these characteristics will outperform in the future. All we have to go on is the lengthy historical performance of these strategies across time, geography and asset classes plus a belief in the underlying rationale as to why they haven’t been arbitraged away.
Glad we both agree that indexing isn’t crucial to defining a transparent rule-based investment strategy and therefore isn’t a basis for criticism per se.
The hedging is spurious because we are supposed to be capturing the *min vol factor*. Otherwise the fund is being mis-sold. Your remark would only be on point if the fund is not about the factor but is instead about having minimum volatility. But these are not the same thing. Furthermore, if it really is supposed to be the latter, in addition to being mis-sold it is being mis-hedged, since for UK it would have to be hedged to sterling. Finally, it is not even clear that hedging to a currency reduces volatility when currency volatilities can be as high a 40% (empirical question, of course, and reduction or increase may depend on which currency hedged to). Then add in the cost of that hedging, which is not being shown in the 0.22% cost. FWIW, I owned both US and UK vanguard emerging mkt etfs and the dividend on the latter was half the rate of the former, showing just what extra hidden costs Vanguard UK is costing compared to US.
Point taken about trackers and indexes. Yes, I am opposed to that discretion too. ftse100 and s&p500 are too small. I just want a bit of everything that is listed on every stock exchange, so for that matter I dont’ even like the ftse all share and the wilshire 5000-just can’t do better than that now. The only discretion I would permit would be if a share is such a small portion of the market cap that it would result in owning less than £500 shares then it may be excluded.
I’m criticising them for trying to predict. We shouldn’t get distracted by the thought that you might take being min vol in first time period as a predictor of min vol in the second. It is some kind of a predictor but that is not the issue. The research finding is just much simpler. The research is based on the the outperformance in the second time period of just whatever *actually had* min vol for the first time period, not for what at the beginning of the second time period was predicted to have min vol.
There is one sense in which all research is based on hindsight, obviously, since our evidence is always what happened in the past. But here the distinction I am drawing is between how that evidence is used. So, not cheating with hindsight example (now talking of modelling): if you have data for 20 years you build a model based on the first 10 years, call it Fred, and then see if it ‘predicts’ the second 10 years. Cheating with hindsight example, build model based on first 10 years, call it Joe. Suppose Joe is lousy on the second 10 years but we keep tweaking it until it gets the second 10 years right, call this Joe*. Suppose Fred is very good on the second 10 years, but not perfect, whereas Joe* is in fact close to perfect. Still, Joe* is essentially worthless as a real predictor for the future whilst Fred has some value.
I agree entirely with your point about ‘all we have to go on…’ Indeed, suitably generalised, that is all we EVER have to go on about any contingent propositions, i.e. apart from logical truths and mathematics. So we should be aware that the following remark, whilst true, is somewhat trivial: ‘There is no guarantee that stocks with these characteristics will outperform in the future’. There is no guarantee that the sun will rise tomorrow either. This is merely Hume’s point about induction.
What is being discussed here is not the problem of induction. Rather, it is exactly which property the research has shown to have outperformed in the past and whether Vanguard have set up an etf that buys shares with that property. The property is not that of having been predicted to have min vol but having actually had min vol.
Deep!
@ TA – “Vanguard haven’t published those details yet and neither have Morningstar. I’d give it 6 – 12 months to settle down.” Who will invest in them if we know nothing?
@ Everybody – there are some relevant documents from Vanguard:
https://www.institutional.vanguard.co.uk/portal/site/institutional/uk/en/investment-products/factor-investing
Like this: http://www.factors.vanguard-ebook.co.uk/#page1
The Vanguard International Value Fund (VTRIX) invests in non-U.S. companies from developed and emerging markets. It is available in the USA.
I made calculation. If You invested 100 Dollars in Vanguard International Value Fund (VTRIX) dec 31, 2000 than You had 195 Dollars at the end of 2014. But if You invested the same 100 Dollars in MSCI ACWI ex USA Value Index You had 225 dollars!
The Vanguard International Value Fund (VTRIX) contains just 158 stocks but the MSCI ACWI ex USA Value Index contains 1000 stocks!
The MSCI ACWI ex USA Value Index more diversified and outperformed the VTRIX from 2001-2014!!!!
https://www.docdroid.net/YXgdTNb/vanguard-in-value-fund.xls.html
Gregory
The Vanguard International Value Fund (VTRIX) is actively managed of course.
@ Gregory – institutional investors. Thanks for the links.
@ Clay – I like your explanation of use of research, I just don’t know how you can deduce what they are actually doing from the fluff they’ve published so far.
Your analogy about the sun is off-beam. The sun has risen over the Earth for 5 billion years and no force on this planet will stop it doing so again tomorrow. Meanwhile, the evidence for factors is based on, at best, 90 years of data that’s full of flaws and markets where the sun ceased to rise. Moreover, the premium earned for factors is apt to be arbitraged away or at the very lest reduced by a force as puny as human behaviour. Before anyone invests in factors, it’s worth their while understanding the basis on which their historical outperformance rests and why it may or may not continue tomorrow. Only then, I believe, is an investor able to make an informed decision about the risk they’re taking on.
@TA I was just taking the following quotation and the rest of what I quoted above from them at its word:
“quantitative model evaluates the securities in the Benchmark by reference to characteristics designed to measure their exposure to a variety of factors that drive a security’s volatility…”
I wasn’t making a deduction but an inference to best explanation: that their model was an attempt to predict which stocks would have min vol in the coming time period. But you are quite right, a huge range of possibilities are consistent with what they said. Indeed, the last sentence allowing human intervention means they could even buy premium bonds without *logically contradicting* their fact sheet.
You’re the one who raised the issue of the lack of guarantee that the future will resemble the past. Once you point out that out, the fact of that possibility is not changed by whether you have 90 years data or 5 billion years data. There is no guarantee in either case. You are just assuming that the way the solar system has behaved in the past will continue into the future. I assume that too, but not because I think it is guaranteed whilst the factor premium is not. That being said, I agree with your specific points about factor investment. I also liked your earlier post showing that even if we assumed the future factor premium *will* resemble the past factor premium, it is very hard to invest in a way that the theoretical premiums of research are realized in anyone’s actual investment (no long/short, trading costs etc leaving, if I remember rightly, a premium as little as 0.5% from a theoretical premium of 4%). Interestingly enough, Asness addresses this problem and claims the opposite for momentum in his paper which I linked to above.
Good discussion, Clay. I enjoyed it. Cheers!
Sorry, meant to say I’ll take a look at that Asness paper when I get time over Christmas. Thanks for the link.
Likewise. I always enjoy your blog.
great reading
What interests me here is whether to swap my poor proxy for a value tilt, VHYL, with the new Value Factor ETF. In an otherwise completely passive portfolio, I’m reticent. The imp on my shoulder says that its OK because Vanguard is solving the lack of a factor index to track with its own algorithm for an index, and that’s not much different from a “real” index, apart from openness of algorithm (important as that is).
Well said TT! Exactly the same issue I am having!
http://europe.etf.com/blog/11304-will-vanguard-manage-to-crack-the-active-etf-market.html?year=2015&month=12&Itemid=127
Vanguard has a very good 2015 research paper on factor based investing at https://advisors.vanguard.com/iwe/pdf/ISGFBI.pdf?cbdForceDomain=true
Characteristics, top 10 holdings, country exposure are public now. VVAL : P/E=15,7; 57% US (31 December 2015).
https://www.vanguard.co.uk/adviser/adv/detail/etf/overview?portId=9397&assetCode=EQUITY##overview
@gregory good info! Geographically looks pretty similar to actual global equity distribution. I wonder if by design (active) or accident (passive).
magneto said “If an investor were to diversify and buy some of each, would he perchance end up back with a cap weighted index fund?
Suspect not, but where would he be?”
Accumulator replied “theoretically yes, because the factors are subsets of the total market, you could end up with a combo that just returns the market for a higher cost! But… the research I’ve read suggests a portfolio of low correlated factors has the potential to improve expected returns and lower volatility. No guarantees mind!”
I’ve just read Andrew Ang’s “Asset Management: A Systematic Approach to Factor Investing”. In it, IIRC, he says a 5 factor portfolio would only capture about 40-50% of the market/equity factor.
I’m still waiting for info on how “active” this is. I see Goldman Sachs ActiveBeta GSIE and GSLC are “not actively managed despite [their] name”. GSIE is 0.35% but GSLC just 0.09%, which makes it attractive indeed. At this point you are betting on Vanguard vs Goldman’s index setting algorithm.
From today Factsheets (PDF format; 31 December 2015) available.https://www.vanguard.co.uk/adviser/adv/detail/etf/overview?portId=9397&assetCode=EQUITY##overview
1 year later.
Well, that’s worked out smashingly – ended up switching to VVAL in June when I had the 55k for SIPP&ISA, VVAL has risen 37% since then, vs 19% for VHYL.
I shall soon rebalance over mince pies and sherry.