The behemoth fund group Vanguard Asset Management has launched four new global factor investing ETFs, based on the value [1], liquidity [2], momentum [3], and low volatility [4] return premiums.
My thanks to reader Snowman for tipping us off [5] 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 [6] in the investing media.
They are also listed on Vanguard’s UK index fund and ETF page [7]:
[8]Vanguard’s four new factor ETFs listed on its website. Today.
Never mind the potential downsides [9] – feel those low total expense ratios!
Here’s how Vanguard’s factsheets describe its new ETFs1 [10]:
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 [11] 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 [12] will outperform in the future.
Indeed none other than Vanguard’s founder Jack Bogle once said [13]:
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 [14] to the return premiums
- An good interview about factor investing [15] [Video]
- Why the return premiums flatter to deceive [9]
- Why Lars Kroijer believes you should stick with market cap trackers [16]
- 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. [↩ [21]]