VFMF vs VFMFX in Taxable Account

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Huygens
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VFMF vs VFMFX in Taxable Account

Post by Huygens »

I plan to purchase one of Vanguard’s multifactor funds in my taxable account. I intend to treat it as a core US equity holding.

I am debating between the ETF (VFMF) and the mutual fund (VFMFX). I have generally preferred mutual funds over ETFs for most of my other holdings, but these funds are somewhat peculiar. I am curious to see what others have done. Some considerations that came to mind:
  • Volume and Liquidity: I was surprised to see very low trading volume for VFMF today. Approximately 8,000 shares were traded today, and the size was often 0 x 0. Is this something to be concerned about? In the event that I would need to liquidate the holding for emergency purposes, I worry that the illiquidity could be an issue.
  • Capital Gains: Unlike many other Vanguard funds, VFMF and VFMFX are not structured as different share classes of the same fund. I wonder why. (Their holdings seem to vary slightly as well.) Does this affect VFMFX’s tax efficiency? Will VFMFX be unable to dispose of capital gains without ETF shares? I worry about higher turnover in the fund due to its factor strategies, but I noticed it did not distribute capital gains for 2018.
  • Conversion and Transfer: For the same reason, VFMFX shares cannot be converted to VFMF. If I were to move assets from Vanguard to another brokerage, would I need to liquidate my holding, potentially resulting in realized gains?
How should I be weighing these factors, no pun intended? Is there anything else I’ve missed? (I also understand that VFMFX has a $50,000 minimum, but I will meet that minimum in my taxable account.)
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jhfenton
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Re: VFMF vs VFMFX in Taxable Account

Post by jhfenton »

The implied liquidity on VFMF is much better than the actual volume. You would have no trouble buying or selling six figure positions within the typical 6 cent spread. I have never seen the bid-ask size at 0 x 0, and I doubt that was valid data. The spread has consistently been 6 cents since it launched a year ago. The fund is also growing slowly, but steadily. In the long run, it will have far higher AUM and a bit more volume.

I personally own VFMFX in two retirement accounts, but I also own similarly-sized VFVA (Vanguard US Value ETF) in the same two retirement accounts, and VFVA has even lower volume and assets than VFMF. (But they are the largest of the factor funds Vanguard launched a year ago.) I am also using VFMFX as a core holding, but I am splitting my US between VFMFX and VFVA (not counting what I have in our 401(k)s).

In a taxable account, I would definitely go with VFMF. Unlike most of Vanguard's equity mutual funds with ETF twins, VFMF and VFMFX are entirely separate funds. VFMFX cannot use VFMF to off-load low-basis shares the way VFIAX (Vanguard 500 Index) can with VOO. It is likely that in the long run VFMFX will be significantly less tax efficient than VFMF.
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Huygens
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Re: VFMF vs VFMFX in Taxable Account

Post by Huygens »

Thanks, jhfenton. I appreciate your response.
jhfenton wrote: Fri Feb 08, 2019 8:09 pm I personally own VFMFX in two retirement accounts, but I also own similarly-sized VFVA (Vanguard US Value ETF) in the same two retirement accounts, and VFVA has even lower volume and assets than VFMF. (But they are the largest of the factor funds Vanguard launched a year ago.) I am also using VFMFX as a core holding, but I am splitting my US between VFMFX and VFVA (not counting what I have in our 401(k)s).
Interesting. Do you mind commenting on why you’re using both VFMFX and VFVA? VFMFX already targets the value factor (in addition to momentum and quality). Are you looking for more value exposure than what VFMFX provides? Do you have equal weights of both?
HippoSir
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Re: VFMF vs VFMFX in Taxable Account

Post by HippoSir »

I purchased a fairly significant chunk of VFMF in $50k blocks just to make sure I didn't hit any surprises, but I needn't have bothered. It is highly liquid despite the volume.
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jhfenton
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Re: VFMF vs VFMFX in Taxable Account

Post by jhfenton »

Huygens wrote: Fri Feb 08, 2019 11:39 pm Interesting. Do you mind commenting on why you’re using both VFMFX and VFVA? VFMFX already targets the value factor (in addition to momentum and quality). Are you looking for more value exposure than what VFMFX provides? Do you have equal weights of both?
Yes. I was looking for more value exposure than VFMFX provides. I've always tilted to value (since the late 90s), and I didn't want to give that up. But VFVA did allow me to simplify our non-401(k) holdings while keeping a deep value tilt. I really like that it spans the entire market cap spectrum. I don't need to hold separate mid-cap and small-cap value funds. (I do still have mid and small cap funds in our 401(k)s, because that is what we have to choose from.)

VFMF/VFMFX I see as a core holding, basically momentum and quality at a reasonable price. In retirement, I could see simplifying to that as my only US equity holding.

For now, I have equal weights of both. 50/50 makes it easy to manage.
HippoSir wrote: Sat Feb 09, 2019 1:29 am I purchased a fairly significant chunk of VFMF in $50k blocks just to make sure I didn't hit any surprises, but I needn't have bothered. It is highly liquid despite the volume.
+1 In my original thread on the factor funds, a Boglehead purchased roughly a million dollars of VFVA in two orders (one modest, one large) at Fidelity in the last week of 2018, both inside the spread.
manlymatt83
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Re: VFMF vs VFMFX in Taxable Account

Post by manlymatt83 »

Curious, do you hold any of $SLYV or $IJS for even deeper value exposure alongside these two core holdings?
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