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The Vanguard Group has a reputation for offering passive index-tracking mutual funds and exchange-traded funds at the lowest possible cost. It hasn't hesitated to criticize more expensive ETF providers for taking more of their investors' money than they should, and it has pulled in trillions of dollars of assets from investors who like its shareholder-owned fund structures and cheap fund offerings. A whole generation of Vanguard investors has adopted what they see as the fund manager's corporate philosophy that active investing is a waste of money.
Yet earlier in February, Vanguard appeared to move in a completely new direction with a set of new ETF offerings. The company released six new funds that seek to jump onto an industry trend known as factor investing, featuring stocks that share certain attractive traits that investors want to focus on in their portfolios. Most factor ETFs are actively managed, leaving some to wonder whether Vanguard has abandoned its long-held emphasis on passive index investing.
So, has Vanguard lost its way? Or should investors see the new ETFs as merely another way in which the fund giant has sought to give its shareholders more choices? Let's look more closely at these new Vanguard factor ETFs to see what's underneath the hood.
| Vanguard Factor ETF | Emphasis on Stocks That... | Expense Ratio |
|---|---|---|
| Vanguard U.S. Liquidity Factor (NYSEMKT: VFLQ) | Trade less frequently | 0.13% |
| Vanguard U.S. Minimum Volatility (NYSEMKT: VFMV) | Move less abruptly | 0.13% |
| Vanguard U.S. Momentum Factor (NYSEMKT: VFMO) | Have risen sharply recently | 0.13% |
| Vanguard U.S. Multifactor (NYSEMKT: VFMF) | Combine all of these factors | 0.18% |
| Vanguard U.S. Quality Factor (NYSEMKT: VFQY) | Have strong balance sheets and earnings | 0.13% |
| Vanguard U.S. Value Factor (NYSEMKT: VFVA) | Are low-priced compared to fundamental prospects | 0.13% |
Data source: Vanguard.
What is a factor ETF?
Vanguard notes that despite the recent introduction of the factor ETF concept to the exchange-traded fund market, there's nothing new about looking for stocks that share common attractive characteristics. What the new ETFs do is allow investors to concentrate on certain areas. In choosing its factors, Vanguard has noted that on the whole, the following statements tend to be true:
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Cheap stocks earn higher returns than expensive stocks.
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Stocks that have done well lately earn higher returns going forward than those that have done poorly recently.
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Stocks with better company fundamentals outperform those with weaker fundamentals.
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Stocks with less trading liquidity have done better than those with more liquidity.