Vanguard unveils suite of actively managed factor ETFs in US

Feb 19th, 2018 | By | Category: Equities

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Vanguard has launched six new actively managed factor ETFs on Cboe ETF Marketplace, the US exchange formerly known as BATS.

Vanguard CEO Tim Buckley.

Vanguard CEO Tim Buckley.

The suite consists of five single factor funds, targeting exposure to the minimum volatility, value, momentum, liquidity, and quality factors, and a multi-factor approach, each based on the US equities universe.

The Vanguard US Liquidity Factor ETF (VFLQ US) invests in stocks with lower measures of trading liquidity.

The Vanguard US Minimum Volatility ETF (VFMV US) invests in stocks with lower volatility relative to the broad US equity market.

The Vanguard US Momentum Factor ETF (VFMO US) invests in stocks with strong recent performance; the Vanguard US Quality Factor ETF (VFQY US) invests in stocks with strong fundamentals.

The Vanguard US Value Factor ETF (VFVA US) invests in stocks with relatively lower share prices relative to fundamental values.

Meanwhile the Vanguard US Multifactor ETF (VFMF US) invests in stocks with exposure to the momentum, value and quality factors.

Each fund may invest in stocks across the US market capitalization spectrum and will employ rules-based processes to screen out thinly traded stocks and enhance portfolio diversification.

The single factor ETFs have expense ratios of 0.13% while the multi-factor fund costs a little more at 0.18%. True to Vanguard’s reputation, both price points are significantly lower than the average actively managed ETF expense ratio for US equity funds.

“The newly launched factor funds further broaden our active equity line-up and represent a differentiated approach – disciplined, rules-based, targeted exposure to factors – along with Vanguard’s low costs,” said Vanguard CEO Tim Buckley. “The funds are aimed primarily at financial advisors and institutional investors, who we believe understand the risks of potential underperformance and can effectively incorporate factor funds into their portfolios.”

The funds mark a change of strategy for Vanguard’s ETF division, which has traditionally been known for launching market capitalisation-weighted, broad-market exposures. The firm believes, however, that by launching factor-based products in the active ETF space, there exists an enhanced ability to track the required factor exposure relative to an index-based approach.

In a passive approach exposure to the factor may decay from the time of index rebalancing, whereas active management allows for discretionary rebalancing to sharpen factor exposure.

While the funds are Vanguard’s first roll-out of active ETFs in the US, the company does have a long history of active management in the mutual fund space. It credits a focus on low costs, rigorous fund oversight, and access to a diverse group of talented managers for its history of competitive performance – Vanguard’s actively managed funds outperformed their peer group averages over the past five- and ten-year periods – 91% and 93%, respectively.

The new funds will be managed by Vanguard Quantitative Equity Group (QEG). Established by Vanguard founder John C. Bogle and then-Chief Investment Officer Gus Sauter, QEG is Vanguard’s third largest active equity manager, overseeing more than $39 billion.

The launch of these active factor funds also marks the first time Vanguard has chosen to list ETFs on Cboe ETF Marketplace.

Commenting on the launch, Laura Morrison, senior vice president, global head of ETPs at Cboe Global Markets, said: “A significant measure of any market is the quality of participants it attracts and Vanguard’s arrival at the Cboe ETF Marketplace as an issuer is a major milestone for our team. We are looking forward to a long-lasting and fruitful relationship. As proud operators of some of the largest markets in the US we are also particularly thrilled that it’s this suite of products that have found their home with us.”

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