Some stocks with lower liquidity traits can be good investments, but stock-picking in this arena can be a cumbersome task. A new ETF from Vanguard aims to solve some of the problems associated with more thinly traded stocks.
The Vanguard U.S. Liquidity Factor ETF (Cboe: VFLQ) seeks to provide long-term capital appreciation by investing in stocks with lower measures of trading liquidity. VFLQ debuted in February as part of a broader suite of actively managed ETFs from Vanguard.
The new ETF “invests in stocks with relatively lower measures of trading liquidity,” according to Vanguard. “The portfolio includes a diverse mix of stocks representing many different market capitalizations (large, mid, and small), market sectors, and industry groups.”
Analyzing VFLQ
“We looked across the large-cap, the mid-cap, and the small-cap space, in each of those areas we’re going to try to target and identify stocks that are less liquid. They’re not illiquid, they’re going to be less liquid,” said Frank Chism, a senior product manager, at Vanguard. “So instead of buying a huge bank that trades 60 million shares a day, we’re going to buy a smaller regional bank maybe that trades 3 or 4 million shares a day. So it’s still liquid, just not the most liquid thing in the market.”
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VFLQ holds over 900 stocks a with a median market value of $4.9 billion, putting the fund in mid-cap territory. The new ETF allocates over 35% of its weight to financial services stocks while the healthcare and producer durables sectors combine for almost 28%.
“The ETF looks at three characteristics when determining if a particular stock will be included in the fund: the number of shares trading on an average basis, how many dollars are trading on an average basis and how much price movement the stock is experiencing based on the money being traded,” according to Investopedia.
The ETF charges just 0.13% per year, or $13 on a $10,000 investment, a paltry fee relative to other actively managed products on the market.
Each of the single factor-specific active ETFs come with a 0.13% expense ratio, whereas the multifactor ETF has a 0.18% expense ratio. These are seen as an extension of Vanguard’s low-cost active lineup, which have outperformed their peer group averages over the past 5- and 10-year periods – 91% and 93%, respectively.
For more information on new fund products, visit our new ETFs category.