Drilling Down on Vanguard's Active Multi-Factor ETF

About a year ago, Vanguard introduced its first actively managed exchange traded funds. The suite is comprised of five single-factor strategies and one multi-factor product, the Vanguard U.S. Multifactor ETF (CBOE: VFMF).

The new ETFs are seen as a stark contrast from the ETF provider’s “plain vanilla” products. Furthermore, while smart beta or factor-based ETF strategies are not uncommon, Vanguard has taken up the factor-based approach through an actively managed style as opposed to other factor options that follow a passive rules-based indexing methodology. With an active management team, these new Vanguard ETFs may be better able to adapt and monitor potential decays in their factor tilts over time.

VFMF seeks to provide long-term capital appreciation by investing in stocks with relatively strong recent performance, strong fundamentals and low prices relative to fundamentals. The fund’s advisor uses a quantitative model to deliver exposure to multiple investment factors.

“After applying an initial screen to remove the most volatile stocks in the universe, stocks are then selected according to their equally weighted ranking across three targeted factors; momentum- stocks that exhibit strong recent performance, quality- stocks that exhibit strong fundamentals, and value- stocks with low prices relative to fundamentals,” according to Vanguard.

VFMF holds nearly 550 stocks with a median market value of $7.6 billion, giving the fund a mid-cap tilt, but VFMF’s holdings can be pulled from the large-, mid- and small-cap universes.

Inside VFMF

VFMF “diversifies across the value, momentum, and quality factors, which can reduce the risk of underperformance because these factors tend to pay off at different times,” said Morningstar in a recent note. “It excludes liquidity partially because it would increase transaction costs when combined with a higher-turnover factor, like momentum.”