Vanguard Takes Active Factor ETF Approach

February 15, 2018

Today Vanguard is entering a space no one really thought to see them in, and it’s doing it entirely on its own terms. The firm is rolling out a family of factor ETFs, which is typically thought of as being part of the smart-beta trend, except these funds are actively managed and are Vanguard’s first actively managed ETFs.

The six ETFs rolling out today comprise five single-factor funds and a multifactor fund. The products, their tickers and expense ratios are as follows:

The family of funds lists on Cboe Global Markets, the parent company of

All of the ETFs can select their holdings from across the size spectrum of U.S. stocks, and rely on a quantitative model to evaluate potential holdings. The funds use a rules-based screen to ensure diversification and limit exposure to certain less liquid stocks, according to the prospectus.

“For us, this kind of rounds out a suite of offerings for investors, ranging from our active products to our index products, and now factor products. We think that these can play a role in certain investors’ portfolios,” said Matthew Jiannino, head of quantitative equity product management at Vanguard, whose group manages the funds.

“The exciting thing for us is this idea that the technology advancements that have happened over recent years really allow investors to look at their portfolios through a factor lens,” he added. “These are products that, once they understand what those exposures are, can … potentially help them reach some sort of goal in their portfolio.”

Surprising Development

At first glance, the launch seems like it’s coming out of left field. Vanguard has been consistently skeptical of popular trends like smart beta. While it has $1.2 trillion invested in its actively managed funds, it really is known as the firm that originated and popularized index funds under its founder John Bogle.

Its products could almost all be described as “plain vanilla” and broad based, which makes actively managed funds targeting individual factors a bit of a surprise.

Moreover, Vanguard is very thoughtful in how it brings new products to the market, with maybe one or two funds launching a year. A cluster of six launches is practically unheard of.

Forging Its Own Path

However, Vanguard is also known for doing things its own way and doing things in its own time (consider how long it took the company to launch international fixed-income ETFs), and the new fund family occupies a space all its own. These are actively managed factor funds, for one thing, even if they are quantitatively driven. Virtually all of the funds currently marketing themselves as multifactor or single-factor ETFs are index-based.

Jiannino says the decision to use an active approach relates to how Vanguard thinks about markets in general.

“For cap-weighted portfolio management, indexing makes perfect sense. With factor funds, you’re really now deviating from a market-cap weighting, and to us that’s an active decision.” he explained. “It was very important for us to manage that portfolio the way we would manage any of our other active strategies.”

“This allows us to maintain a targeted exposure to the factor over time, so that as the factor may decay in the portfolio, the portfolio manager is going to have the discretion to turn over the portfolio as needed to maintain exposure to that factor long term,” Jiannino added.


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