Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

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Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by bowest » Tue Nov 28, 2017 9:55 am

Vanguard's filed registration for six US smart beta ETFs. This will be a fun thread to watch.


https://pressroom.vanguard.com/news/Pre ... 12817.html

VALLEY FORGE, PA (November 28, 2017)—Vanguard today filed a registration statement for six new factor-based ETFs and one factor-based mutual fund, representing Vanguard’s first introduction of actively managed ETFs in the U.S. The company currently offers suites of active factor ETFs in Canada and the United Kingdom. The new factor funds are expected to begin trading in the first quarter of 2018.

Five single factor funds are designed for financial advisors and institutional investors seeking to achieve specific risk or return objectives through targeted factor exposures: minimum volatility, value, momentum, liquidity, and quality. The sixth ETF and fund will offer a multi-factor approach. Vanguard will employ an active, rules-based quantitative approach in managing the funds, which will also feature the traditional characteristic of all Vanguard funds—low cost.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by randomizer » Tue Nov 28, 2017 9:59 am

Cool. Hopefully lower cost than DFA funds.
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by bowest » Tue Nov 28, 2017 10:01 am

randomizer wrote:
Tue Nov 28, 2017 9:59 am
Cool. Hopefully lower cost than DFA funds.
By quite a bit. 13 bps for ETF. 18 bps for multifactor fund.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by alpenglow » Tue Nov 28, 2017 10:04 am

I'm surprised it's taken this long. There is a lot of demand for these types of funds.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by KyleAAA » Tue Nov 28, 2017 10:31 am

I'm cautiously excited about the multifactor value/momentum/quality fund. It's fairly easy to get small/value/quality (IJS/VIOV) but getting momentum exposure without sacrificing value is very difficult. I just hope they don't have a negative loading on small like most multifactor funds seem to have since the data seems to show factors are stronger in smaller stocks.

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Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by matjen » Tue Nov 28, 2017 10:53 am

[merged matjen's thread and its replies into this existing one - moderator prudent]

Yay for factors! Yay for choice!
The new suite of active factor offerings includes:

Vanguard U.S. Minimum Volatility ETF – seeks to provide long-term capital appreciation with lower volatility relative to the broad U.S. equity market.
Vanguard U.S. Value Factor ETF – seeks to provide long-term capital appreciation by investing in stocks with relatively lower share prices relative to fundamental values.
Vanguard U.S. Momentum Factor ETF – seeks to provide long-term capital appreciation by investing in stocks with strong recent performance.
Vanguard U.S. Liquidity Factor ETF – seeks to provide long-term capital appreciation by investing in stocks with lower measures of trading liquidity.
Vanguard U.S. Quality Factor ETF – seeks to provide long-term capital appreciation by investing in stocks with strong fundamentals.
Vanguard U.S. Multifactor ETF – seeks to provide long-term capital appreciation by investing in stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals.
Vanguard U.S. Multifactor Fund – seeks to provide long-term capital appreciation by investing in stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals.
https://www.prnewswire.com/news-release ... 62566.html
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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by livesoft » Tue Nov 28, 2017 10:56 am

Yes, but what does Mr Asness have to say about this?
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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by CULater » Tue Nov 28, 2017 11:03 am

Perhaps this can be labelled as the "death of factors" inflection point, as the hoards of Vanguadians begin madly skating toward where the puck was. Bozo lives!
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by triceratop » Tue Nov 28, 2017 11:07 am

Is there information yet on what factor loads they are targeting? They look like long-only funds.

It will also be amusing for Vanguard to run a multi-billion dollar liquidity fund. :wink:
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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by Da5id » Tue Nov 28, 2017 11:11 am

The press release says "Five single factor funds are designed for financial advisors and institutional investors". Does that mean these 5 are actually limited to those target audiences and the two multifactor funds (ETF/mutual versions) are only for the masses?

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by lack_ey » Tue Nov 28, 2017 11:18 am

So this is where they're launching the actively managed ETFs, after getting that regulatory exception/approval to do so.

It's kind of interesting that they're running active management for this, while most of the competitors are following indexes. There are some advantages to not following an index: being able to rebalance more frequently and recalculate underlying parameters to have more up-to-date metrics between an index's rebalance dates, being able to freely consider trading costs while shifting the portfolio rather than have a mandate to attempt to follow the given recipe, and not having index frontrunning concerns from having your desired actions telegraphed.

Vanguard is significantly undercutting DFA and AQR on costs. They also are competitive with a lot of the competing index-based ETFs. For example, the single-factor funds are launching with an ER of 0.13%, less than the 0.15% of the similar iShares lineup. The multifactor fund is launching at 0.18%, lower than the 0.20% of the iShares U.S. multifactor fund (LRGF), but higher than Goldman Sach's at 0.09% (GSLC) and State Street's at 0.15% (QUS). It undercuts DFA again via the John Hancock ETF they manage at 0.35% (JHML) and RAFI via the PIMCO ETF they manage at 0.29% (MFUS). There are also a number of other competitors from smaller names.

For what it's worth, there are a lot fewer factor funds for international stocks, and the ones that exist are more expensive. It doesn't hurt to hopefully have some Vanguard effect in the US equity factor space, though.

On another note, they're launching a liquidity factor ETF, which many don't have. I'm kind of curious to see what the holdings would be, what the market caps look like, and how they would handle trading. The point here is that these stocks are harder to trade, which makes them less conducive to an index fund format, which is why I suppose we don't see much of this.

One of these days, after these launch, I may have to update my old post about the Vanguard Quantitative Equity Group funds:
viewtopic.php?t=206890

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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by ResearchMed » Tue Nov 28, 2017 11:18 am

matjen wrote:
Tue Nov 28, 2017 10:53 am
Yay for factors! Yay for choice!
The new suite of active factor offerings includes:

Vanguard U.S. Minimum Volatility ETF – seeks to provide long-term capital appreciation with lower volatility relative to the broad U.S. equity market.
Vanguard U.S. Value Factor ETF – seeks to provide long-term capital appreciation by investing in stocks with relatively lower share prices relative to fundamental values.
Vanguard U.S. Momentum Factor ETF – seeks to provide long-term capital appreciation by investing in stocks with strong recent performance.
Vanguard U.S. Liquidity Factor ETF – seeks to provide long-term capital appreciation by investing in stocks with lower measures of trading liquidity.
Vanguard U.S. Quality Factor ETF – seeks to provide long-term capital appreciation by investing in stocks with strong fundamentals.
Vanguard U.S. Multifactor ETF – seeks to provide long-term capital appreciation by investing in stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals.
Vanguard U.S. Multifactor Fund – seeks to provide long-term capital appreciation by investing in stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals.
https://www.prnewswire.com/news-release ... 62566.html
So there is one new mutual fund hidden in this list?

They've already got a Low Volatility Fund. I wonder why they are only doing ETF's of the rest?

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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by mindboggling » Tue Nov 28, 2017 11:26 am

Now, we'll all be able to outperform!
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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by Da5id » Tue Nov 28, 2017 11:29 am

ResearchMed wrote:
Tue Nov 28, 2017 11:18 am
They've already got a Low Volatility Fund. I wonder why they are only doing ETF's of the rest?
They are aiming only for institutional/advisor for the single factor funds according to the press release, maybe ETFs are preferred by those markets?

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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by lack_ey » Tue Nov 28, 2017 11:37 am

Da5id wrote:
Tue Nov 28, 2017 11:11 am
The press release says "Five single factor funds are designed for financial advisors and institutional investors". Does that mean these 5 are actually limited to those target audiences and the two multifactor funds (ETF/mutual versions) are only for the masses?
No, and how would they even limit or control who can own which ETFs? Now, sometimes they try to hide products on the individual investor website, but that's not going to lock you out. But I'd guess they wouldn't even go that far here.

They just have an idea about target audience. In fact, by the time Vanguard launches anything, they've probably been getting lots of requests for it, so they already know who wants these things.
Da5id wrote:
Tue Nov 28, 2017 11:29 am
They are aiming only for institutional/advisor for the single factor funds according to the press release, maybe ETFs are preferred by those markets?
They do prefer ETFs, yes.

There are a number of index funds Vanguard has where there's an ETF but no mutual fund share class below institutional ($5 million minimum), e.g. S&P Small-Cap 600 ETF (VIOO) and Extended Duration Treasury ETF (EDV). I guess they're just skipping the institutional mutual fund class here.

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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by tetractys » Tue Nov 28, 2017 11:52 am

Most interesting I think, is mention of this Vanguard paper:
<https://americas.vanguard.com/docs/lite ... -guide.pdf>
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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by Doc » Tue Nov 28, 2017 11:53 am

Vanguard to introduce its first low cost actively managed ETFs

21 March 2016 | News from Vanguard
Note the date and the date format. :D
Vanguard Investments Canada Inc. filed a preliminary prospectus with Canadian securities regulators to offer four low-cost actively managed factor exchange-traded funds (ETFs).This represents Vanguard’s first actively managed ETFs and will complement the firm’s 23 index-based ETFs.

The four new Vanguard ETFs are as follows:
https://www.vanguardcanada.ca/individua ... active.htm
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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by heyyou » Tue Nov 28, 2017 11:57 am

Regardless of the future returns from those ETFs, the tone of the comments above is likely similar to when JB introduced a retail index fund based on the S&P500. We are just past the 41st anniversary of it. Is VG chasing assets and performance or are they leading the industry into the future?

Should VG have waited until Fidelity did the same, then brought out the VG factor funds?

Has anyone challenged factor investing as being less productive than total market investing? Perhaps both paths are good enough over long periods. "Many roads to Dublin" Taylor Larimore

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Doc » Tue Nov 28, 2017 11:58 am

bowest wrote:
Tue Nov 28, 2017 9:55 am
Vanguard's filed registration for six US smart beta ETFs. This will be a fun thread to watch.
They actually filed for similar Global active ETFS over a year ago.

https://www.vanguardcanada.ca/individua ... active.htm
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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by alpenglow » Tue Nov 28, 2017 11:59 am

mindboggling wrote:
Tue Nov 28, 2017 11:26 am
Now, we'll all be able to outperform!
It's it great when everyone can be above average?!

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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by avalpert » Tue Nov 28, 2017 12:03 pm

heyyou wrote:
Tue Nov 28, 2017 11:57 am
Regardless of the future returns from those ETFs, the tone of the comments above is likely similar to when JB introduced a retail index fund based on the S&P500. We are just past the 41st anniversary of it. Is VG chasing assets and performance or are they leading the industry into the future?

Should VG have waited until Fidelity did the same, then brought out the VG factor funds?
Huh? They have waited until others have brought factor funds to market and demonstrated an existing demand for them. They aren't leading here - clearly following. I find the comparison to the introduction of the first index funds to be incredibly specious.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by antiqueman » Tue Nov 28, 2017 12:07 pm

Vanguard does not state if the Value ETF will be small, mid-cap or large . So we don't know what its really offering in that fund.

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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by oldcomputerguy » Tue Nov 28, 2017 12:13 pm

mindboggling wrote:
Tue Nov 28, 2017 11:26 am
Now, we'll all be able to outperform!
... and every investor will be above average.
:shock:
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Da5id » Tue Nov 28, 2017 12:35 pm

No doubt these funds won't be said by advisers to be as "pure" as AQR/DFA versions. Will be interesting to see how the Vanguard funds compare against higher cost alternatives, particularly if you throw the adviser's AUM fee in. Mind you. perhaps the Vanguard funds really won't be as good, as e.g. the Vanguard small cap fund might might have too many assets to go as far down the "small company" direction of of the size axis.

Still seems like a good thing for those inclined to do factor investing.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by lack_ey » Tue Nov 28, 2017 12:42 pm

antiqueman wrote:
Tue Nov 28, 2017 12:07 pm
Vanguard does not state if the Value ETF will be small, mid-cap or large . So we don't know what its really offering in that fund.
The investment universe includes large, mid, and small, so I would imagine something on average around the very low end of large typically. Vanguard Global Minimum Volatility (VMVFX) by the same group is on the small side of large on average. Vanguard U.S. Value Fund (VUVLX) by the same group says it invests in mid caps and large caps primarily, and is heaviest in large caps but does have significant holdings outside that.

The existing U.S. Value fund is kind of a multifactor fund (primarily screening on quality type measures) constrained to value stocks with a low tracking error mandate to a value index. It's thus not really the same thing as the new value factor ETF, even though it's the same group managing it and nominally it would seem to be similar.
The Fund invests primarily in U.S. common stocks with the potential to generate higher returns relative to the broad U.S. equity market by investing in stocks with relatively lower share prices relative to fundamental values as determined by the advisor. The portfolio will include a diverse mix of companies representing many different market sectors and industry groups. The advisor uses a quantitative model to evaluate all of the securities in an investment universe comprised of U.S. large, mid, and small capitalization stocks and to construct a U.S. equity portfolio that seeks to achieve exposure to securities with lower prices relative to fundamental measures of value subject to a set of reasonable constraints designed to foster portfolio diversification and liquidity. Securities with lower prices relative to fundamental value may be identified by measures such as book to price and earnings to price ratios. Under normal circumstances, at least 80% of the Fund’s assets will be invested in securities issued by U.S. companies.

By the way, the fund filing is HERE.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by tarheel » Tue Nov 28, 2017 1:08 pm

Unfortunately, for us factor nerds investing in these funds will simply come down to factor exposure versus cost. IMO, it takes at least a couple of years before one can reliably identify the factor loadings of a new fund.

Wake me up after three years of results.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by garlandwhizzer » Tue Nov 28, 2017 1:12 pm

Factor investing approaches have strong appeal which is why so much money is flowing that way at present. Vanguard's new offerings both legitimize these approaches and will provide low cost alternatives to the more costly funds/etfs that pursue these strategies. Personally, I have two beliefs on this. First, I'm in favor of choice. Second, I trust Vanguard more than other investment companies due to their ownership structure and their history of high fiduciary responsibility. My equity portfolio holds both cap-weighted ultra low cost indexes and factor approaches. I look forward to these new offerings.

My main concern ironically is that these factor Vanguard offerings will be enormously popular. The money flow into factor approaches is likely to increase massively with the behemoth Vanguard's entry into the field. It is possible that factor overgrazing will occur and the potential outperformance will suffer. The other question is: is it time to start feeling sorry for those who market more expensive factor based products?

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Jack FFR1846 » Tue Nov 28, 2017 1:13 pm

So is this Vanguard's way to make up for all of their "loss leader", low cost index funds?
Bogle: Smart Beta is stupid

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Re: Vanguard To Introduce First Actively Managed ETFs With Suite Of Factor Funds

Post by whodidntante » Tue Nov 28, 2017 1:18 pm

alpenglow wrote:
Tue Nov 28, 2017 11:59 am
mindboggling wrote:
Tue Nov 28, 2017 11:26 am
Now, we'll all be able to outperform!
It's it great when everyone can be above average?!
I've noticed that all the children in my neighborhood are above average.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by whodidntante » Tue Nov 28, 2017 1:21 pm

antiqueman wrote:
Tue Nov 28, 2017 12:07 pm
Vanguard does not state if the Value ETF will be small, mid-cap or large . So we don't know what its really offering in that fund.
Single factor means it will be large biased if not large only.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by triceratop » Tue Nov 28, 2017 1:31 pm

Jack FFR1846 wrote:
Tue Nov 28, 2017 1:13 pm
So is this Vanguard's way to make up for all of their "loss leader", low cost index funds?
no
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Theoretical » Tue Nov 28, 2017 2:21 pm

tarheel wrote:
Tue Nov 28, 2017 1:08 pm
Unfortunately, for us factor nerds investing in these funds will simply come down to factor exposure versus cost. IMO, it takes at least a couple of years before one can reliably identify the factor loadings of a new fund.

Wake me up after three years of results.
Da5id wrote:
Tue Nov 28, 2017 12:35 pm
No doubt these funds won't be said by advisers to be as "pure" as AQR/DFA versions. Will be interesting to see how the Vanguard funds compare against higher cost alternatives, particularly if you throw the adviser's AUM fee in. Mind you. perhaps the Vanguard funds really won't be as good, as e.g. the Vanguard small cap fund might might have too many assets to go as far down the "small company" direction of of the size axis.

Still seems like a good thing for those inclined to do factor investing.
Actually, the Quantitative Equity group has a pretty good track record on the factor loadings. The Vanguard Strategic Small Cap is a slightly larger cap but higher low beta version of QSMLX for a third of the cost. Value, momentum, and quality loads are quite similar too.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Da5id » Tue Nov 28, 2017 2:39 pm

Theoretical wrote:
Tue Nov 28, 2017 2:21 pm
tarheel wrote:
Tue Nov 28, 2017 1:08 pm
Unfortunately, for us factor nerds investing in these funds will simply come down to factor exposure versus cost. IMO, it takes at least a couple of years before one can reliably identify the factor loadings of a new fund.

Wake me up after three years of results.
Da5id wrote:
Tue Nov 28, 2017 12:35 pm
No doubt these funds won't be said by advisers to be as "pure" as AQR/DFA versions. Will be interesting to see how the Vanguard funds compare against higher cost alternatives, particularly if you throw the adviser's AUM fee in. Mind you. perhaps the Vanguard funds really won't be as good, as e.g. the Vanguard small cap fund might might have too many assets to go as far down the "small company" direction of of the size axis.

Still seems like a good thing for those inclined to do factor investing.
Actually, the Quantitative Equity group has a pretty good track record on the factor loadings. The Vanguard Strategic Small Cap is a slightly larger cap but higher low beta version of QSMLX for a third of the cost. Value, momentum, and quality loads are quite similar too.
Sure, but the Vanguard Strategic Small Cap has only $1.7B assets. And at that, the median market cap of the funds investments is $2.4B. These new funds, if they go big, will have much more, which may make it difficult to be on the smaller cap end of the spectrum just due to scale. Or not, who knows? I expect Vanguard to do a good job at a low cost, just wondering what the AQR/DFA/adviser spin or response will be to it.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by columbia » Tue Nov 28, 2017 2:52 pm

Doesn't the proliferation of such funds decrease the chances of said factors "working" (assuming they have in the past)?

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by lack_ey » Tue Nov 28, 2017 3:28 pm

columbia wrote:
Tue Nov 28, 2017 2:52 pm
Doesn't the proliferation of such funds decrease the chances of said factors "working" (assuming they have in the past)?
Sure, to the extent that this increases the demand for these securities relative to the other ones, increasing the price and valuations and thus reducing the forward return. This is a bigger problem for lower-turnover smart beta strategies, where if the holdings get bid up, they're keeping them for the long run at the higher valuations.

The actual trading volume and pricing pressure from these kinds of factor approaches has some impact, but it's not exactly moving the markets as much as some people are thinking. The plain value factor was expensive relative to history in 2005, and despite all the factor bandwagoning since then, we've seen growth stocks get more expensive relative to value stocks since (and growth stocks beat value stocks in performance). Also since 2010, so it's not all from the financial crisis and pre-crisis valuations.

There's maybe too much interest in some of these things, and some are bid up. Others seem in the realm of normal. Nothing looks like it's on fire.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Taylor Larimore » Tue Nov 28, 2017 3:36 pm

heyyou wrote: Has anyone challenged factor investing as being less productive than total market investing? Perhaps both paths are good enough over long periods. "Many roads to Dublin" Taylor
heyyou:

Some "roads to Dublin" (the factor roads) are likely to be bumpy because they add market sector risk, manager risk, cost and complexity. Mr. Bogle explains:
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
The Three-Fund Portfolio

Best wishes.
Taylor
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by nisiprius » Tue Nov 28, 2017 3:48 pm

Rick: Stop it. You know what I want to hear.
Sam: No, I don't.
Rick: You played it for her. You can play it for me.
Sam: I don't think I can remember.
Rick: If she can stand it, I can. Play it.

I've managed to stare at this for decades and my head hasn't exploded so I guess if I can stand this, I can stand them introducing their new funds. The main thing I'm in suspense about is whether they will classify these new funds as "index" or "active!"

Image

But as long as Vanguard keeps providing the funds I want, I don't mind if they give other clients what they want, too. "For those who like this sort of thing, this is the sort of thing they will like."

I betcha a nickel, even money, that they don't put any of these new funds in their Target Retirement or LifeStrategy funds.
Last edited by nisiprius on Tue Nov 28, 2017 4:46 pm, edited 1 time in total.
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Theoretical
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Theoretical » Tue Nov 28, 2017 3:51 pm

From the prospecti:
• Vanguard U.S. Liquidity Factor ETF invests primarily in U.S. common stocks with the potential to generate higher returns relative to the broad U.S. equity market by investing in stocks with lower measures of trading liquidity as determined by the advisor. The portfolio will include a diverse mix of companies representing many different market sectors and industry groups. The advisor uses a quantitative model to evaluate all of the securities in an investment universe comprised of U.S. large, mid, and small capitalization stocks and to construct a U.S. equity portfolio that seeks to achieve exposure to securities with lower measures of trading liquidity subject to a set of reasonable constraints designed to foster portfolio diversification and liquidity. Securities with lower measures of trading liquidity may be identified by daily trading volume and the impact such trading has on the security's price.

• Vanguard U.S. Minimum Volatility ETF invests primarily in a group of U.S. common stocks that together are deemed by the advisor to have the potential to generate lower volatility relative to the broad U.S. equity market. The portfolio will include a

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diverse mix of companies representing many different market sectors and industry groups. The advisor uses a quantitative model to evaluate all of the securities in an investment universe comprised of U.S. large, mid, and small capitalization stocks and to construct a U.S. equity portfolio that seeks to achieve the lowest amount of expected volatility subject to a set of reasonable constraints designed to foster portfolio diversification and liquidity.

• Vanguard U.S. Momentum Factor ETF invests primarily in U.S. common stocks with the potential to generate higher returns relative to the broad U.S. equity market by investing in stocks with strong recent performance as determined by the advisor. The portfolio will include a diverse mix of companies representing many different market sectors and industry groups. The advisor uses a quantitative model to evaluate all of the securities in an investment universe comprised of U.S. large, mid, and small capitalization stocks and to construct a U.S. equity portfolio that seeks to achieve exposure to securities with relatively strong recent performance subject to a set of reasonable constraints designed to foster portfolio diversification and liquidity. Securities with relatively strong recent performance may be identified by measures such as performance over different time periods.

• Vanguard U.S. Multifactor ETF invests primarily in U.S. common stocks with the potential to generate higher returns relative to the broad U.S. equity market by investing in stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals as determined by the advisor. The portfolio will include a diverse mix of companies representing many different market sectors and industry groups. The advisor uses a quantitative model to evaluate all of the securities in an investment universe comprised of U.S. large, mid, and small capitalization stocks and to construct a U.S. equity portfolio that seeks to achieve exposure to multiple factors subject to a set of reasonable constraints designed to foster portfolio diversification, liquidity, and lower volatility.

• Vanguard U.S. Quality Factor ETF invests primarily in U.S. common stocks with the potential to generate higher returns relative to the broad U.S. equity market by investing in stocks with strong fundamentals as determined by the advisor. The portfolio will include a diverse mix of companies representing many different market sectors and industry groups. The advisor uses a quantitative model to evaluate all of the securities in an investment universe comprised of U.S. large, mid, and small capitalization stocks and to construct a U.S. equity portfolio that seeks to achieve exposure to securities with strong fundamentals subject to a set of reasonable constraints designed to foster portfolio diversification and liquidity. Securities with relatively strong fundamentals may be identified by measures such as strong profitability, sustainable earnings, and healthy balance sheets.

• Vanguard U.S. Value Factor ETF invests primarily in U.S. common stocks with the potential to generate higher returns relative to the broad U.S. equity market by investing in stocks with relatively lower share prices relative to fundamental values as

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determined by the advisor. The portfolio will include a diverse mix of companies representing many different market sectors and industry groups. The advisor uses a quantitative model to evaluate all of the securities in an investment universe comprised of U.S. large, mid, and small capitalization stocks and to construct a U.S. equity portfolio that seeks to achieve exposure to securities with lower prices relative to fundamental measures of value subject to a set of reasonable constraints designed to foster portfolio diversification and liquidity. Securities with lower prices relative to fundamental value may be identified by measures such as book to price and earnings to price ratios.

The investment advisor's quantitative model for each Factor ETF (except for the Multifactor ETF and Minimum Volatility ETF) first groups the securities within the Fund's investment universe by market capitalization and then ranks each security within each group by reference to characteristics designed to measure its exposure to a desired factor. The model determines the identity and amount of securities to include within the portfolio based on such rankings.

For the Multifactor ETF, the investment advisor's quantitative model first groups the securities within the Fund's investment universe by market capitalization and then ranks each security within each group by reference to characteristics designed to measure its exposure to the momentum, quality, value and volatility factors. The model then places emphasis on the securities with the lowest rakings related to volatility and the highest rankings related to momentum, quality and value factors. The model determines the identity and amount of securities to include within the portfolio based on such rankings.

For the Minimum Volatility ETF, the investment advisor's quantitative model evaluates the securities in the Fund's investment universe by reference to characteristics designed to measure their exposure to a variety of factors that influence a security's volatility such as sector, liquidity, size, and value. The model also assesses the interaction between these factors and their impact on the overall volatility of the portfolio.

lack_ey
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by lack_ey » Tue Nov 28, 2017 3:55 pm

nisiprius wrote:
Tue Nov 28, 2017 3:48 pm
The main thing I'm in suspense whether they will classify these new funds as "index" or "active!"
No need to be in suspense. These don't follow indexes and are managed by the team that runs other funds with similar investment mandates and quant construction that they label as active. Their press release calls these "actively managed ETFs" so that is clear enough. Other divisions of Vanguard that already offer similar products call these active ETFs, such as in Vanguard Canada, and have a separate category and page explaining those as opposed to the index ETFs.

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tarheel
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by tarheel » Tue Nov 28, 2017 4:00 pm

Theoretical wrote:
Tue Nov 28, 2017 2:21 pm
tarheel wrote:
Tue Nov 28, 2017 1:08 pm
Unfortunately, for us factor nerds investing in these funds will simply come down to factor exposure versus cost. IMO, it takes at least a couple of years before one can reliably identify the factor loadings of a new fund.

Wake me up after three years of results.
Da5id wrote:
Tue Nov 28, 2017 12:35 pm
No doubt these funds won't be said by advisers to be as "pure" as AQR/DFA versions. Will be interesting to see how the Vanguard funds compare against higher cost alternatives, particularly if you throw the adviser's AUM fee in. Mind you. perhaps the Vanguard funds really won't be as good, as e.g. the Vanguard small cap fund might might have too many assets to go as far down the "small company" direction of of the size axis.

Still seems like a good thing for those inclined to do factor investing.
Actually, the Quantitative Equity group has a pretty good track record on the factor loadings. The Vanguard Strategic Small Cap is a slightly larger cap but higher low beta version of QSMLX for a third of the cost. Value, momentum, and quality loads are quite similar too.
Very interesting.....I hadn't known about those funds. What say you AQR fans? grap? lackey?

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by lack_ey » Tue Nov 28, 2017 4:07 pm

tarheel wrote:
Tue Nov 28, 2017 4:00 pm
Very interesting.....I hadn't known about those funds. What say you AQR fans? grap? lackey?
Decent, I guess. I refer you to my previous posting:
viewtopic.php?t=206890

Most of those existing funds seem to use the same screens, looking for five characteristics. These end up generally overlapping with the usual quality definitions, and value and momentum to an extent.

The new active ETFs don't have the same language, and will probably target different exposures than the existing products. I would urge caution, and there's not much known now. But certainly the group has a reasonable if hardly amazing track record. I'd say the low cost is the main advantage.

I wouldn't call myself a general AQR fan (or detractor), just sayin' for the record...

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by triceratop » Tue Nov 28, 2017 4:10 pm

Taylor Larimore wrote:
Tue Nov 28, 2017 3:36 pm
heyyou wrote: Has anyone challenged factor investing as being less productive than total market investing? Perhaps both paths are good enough over long periods. "Many roads to Dublin" Taylor
heyyou:

Some "roads to Dublin" (the factor roads) are likely to be bumpy because they add market sector risk, manager risk and cost. Mr. Bogle explains:
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
The Three-Fund Portfolio

Best wishes.
Taylor
There is not much manager risk to be concerned about when one uses index funds to invest in factors. Sector risk can be examined by viewing the Morningstar Portfolio page for a small value fund and selecting VTI as the benchmark

But I want to examine the (unproven yet stated) claim that there is significant extra cost for all investors in using factors. Let's compare the total cost of adding two factors: small stocks and value stocks. The investor profile is an investor in California in the 25% federal bracket and the 9.3% state bracket. This is pretty typical. The index is the S&P 600 Value index, accessed through the Vanguard S&P Small-Cap 600 Value ETF (VIOV) at a cost of 0.20% (which is 0.16% higher than that of a total market fund). The Total Market fund, for this investor, has cost around 0.13% more in taxes (to say nothing of creating unwanted income which may increase likelihood of credit/deduction phaseouts).

So the added cost has been 3bp to gain access to Value (0.50 factor loading) and Small (0.81 factor loading).

(In the top federal/CA tax bracket of 39.6%/10.3% the Small Value fund saved 3bp in cost compared to the total market fund)
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Leif
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Leif » Tue Nov 28, 2017 4:11 pm

Great news. I think DFA will need to make some significant ER price drops with this type of competition. Perhaps DFA will finally put out ETFs. If not, well all my DFA funds are in retirement accounts...
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by randomguy » Tue Nov 28, 2017 4:20 pm

Taylor Larimore wrote:
Tue Nov 28, 2017 3:36 pm
heyyou wrote: Has anyone challenged factor investing as being less productive than total market investing? Perhaps both paths are good enough over long periods. "Many roads to Dublin" Taylor
heyyou:

Some "roads to Dublin" (the factor roads) are likely to be bumpy because they add market sector risk, manager risk and cost. Mr. Bogle explains:
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners."
The Three-Fund Portfolio

Best wishes.
Taylor

nah the road is smoother. All that loading should be giving you higher returns so you can hold less stocks and have the smooth ride. Or you can have the same bumps but get to the destination quicker. Or you can crash:)

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by lack_ey » Tue Nov 28, 2017 4:31 pm

Leif wrote:
Tue Nov 28, 2017 4:11 pm
Great news. I think DFA will need to make some significant ER price drops with this type of competition. Perhaps DFA will finally put out ETFs. If not, well all my DFA funds are in retirement accounts...
They're two years old, and they're distributed by John Hancock. Or rather, they're John Hancock ETFs following custom DFA indexes.

For example, John Hancock Multifactor Large Cap ETF (JHML, fact sheet) has an ER of 0.35% and has two named managers from DFA running the fund to the John Hancock Dimensional Large Cap Index, which is a multifactor index doing the usual DFA screens and extras like filtering out low momentum stocks, trying to minimize trading costs, etc.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by nisiprius » Tue Nov 28, 2017 4:54 pm

lack_ey wrote:
Tue Nov 28, 2017 3:55 pm
nisiprius wrote:
Tue Nov 28, 2017 3:48 pm
The main thing I'm in suspense whether they will classify these new funds as "index" or "active!"
No need to be in suspense. These don't follow indexes and are managed by the team that runs other funds with similar investment mandates and quant construction that they label as active. Their press release calls these "actively managed ETFs" so that is clear enough. Other divisions of Vanguard that already offer similar products call these active ETFs, such as in Vanguard Canada, and have a separate category and page explaining those as opposed to the index ETFs.
:oops:

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patrick013
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by patrick013 » Tue Nov 28, 2017 5:05 pm

So the Russell 2000 is getting over-factored. Good enough for
small caps.
age in bonds, buy-and-hold, 10 year business cycle

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grap0013
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by grap0013 » Tue Nov 28, 2017 5:33 pm

tarheel wrote:
Tue Nov 28, 2017 4:00 pm
Theoretical wrote:
Tue Nov 28, 2017 2:21 pm
tarheel wrote:
Tue Nov 28, 2017 1:08 pm
Unfortunately, for us factor nerds investing in these funds will simply come down to factor exposure versus cost. IMO, it takes at least a couple of years before one can reliably identify the factor loadings of a new fund.

Wake me up after three years of results.
Da5id wrote:
Tue Nov 28, 2017 12:35 pm
No doubt these funds won't be said by advisers to be as "pure" as AQR/DFA versions. Will be interesting to see how the Vanguard funds compare against higher cost alternatives, particularly if you throw the adviser's AUM fee in. Mind you. perhaps the Vanguard funds really won't be as good, as e.g. the Vanguard small cap fund might might have too many assets to go as far down the "small company" direction of of the size axis.

Still seems like a good thing for those inclined to do factor investing.
Actually, the Quantitative Equity group has a pretty good track record on the factor loadings. The Vanguard Strategic Small Cap is a slightly larger cap but higher low beta version of QSMLX for a third of the cost. Value, momentum, and quality loads are quite similar too.
Very interesting.....I hadn't known about those funds. What say you AQR fans? grap? lackey?
That Vanguard fund is news to me. Not sure what I think. The AQR fund has had a slightly higher small load otherwise they look pretty similar. AQR fund has about double the holdings. AQR funds tend to be formulaic with patient trading. Not sure about this VG fund. Could this mean there is more manager risk? One can usually tell by low turnover if they follow more rules based investing but with momentum strategies it leads to higher turnover which is also similar between these 2 funds.

I'm limited in my US SCV holdings to VSIAX so I don't have to think about it too much. If my options were wide open I'd probably divide up that part of my portfolio 1/3 each of VBR, DFSVX, and QSMLX. This would be to minimize tracking error regret within SCV and avoid selling low and buying high within this space as sometimes the returns can be quite different.
There are no guarantees, only probabilities.

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grap0013
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by grap0013 » Tue Nov 28, 2017 5:39 pm

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Ok, official no thanks on Vanguard strategic small cap. Had similar returns to good ol' VISVX. A fraction of the # of holdings. Much longer duration of max draw down during 08 financial crisis. Plus there is manager risk. I'll pass.
There are no guarantees, only probabilities.

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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by triceratop » Tue Nov 28, 2017 5:54 pm

grap0013 wrote:
Tue Nov 28, 2017 5:33 pm
tarheel wrote:
Tue Nov 28, 2017 4:00 pm
Theoretical wrote:
Tue Nov 28, 2017 2:21 pm
tarheel wrote:
Tue Nov 28, 2017 1:08 pm
Unfortunately, for us factor nerds investing in these funds will simply come down to factor exposure versus cost. IMO, it takes at least a couple of years before one can reliably identify the factor loadings of a new fund.

Wake me up after three years of results.
Da5id wrote:
Tue Nov 28, 2017 12:35 pm
No doubt these funds won't be said by advisers to be as "pure" as AQR/DFA versions. Will be interesting to see how the Vanguard funds compare against higher cost alternatives, particularly if you throw the adviser's AUM fee in. Mind you. perhaps the Vanguard funds really won't be as good, as e.g. the Vanguard small cap fund might might have too many assets to go as far down the "small company" direction of of the size axis.

Still seems like a good thing for those inclined to do factor investing.
Actually, the Quantitative Equity group has a pretty good track record on the factor loadings. The Vanguard Strategic Small Cap is a slightly larger cap but higher low beta version of QSMLX for a third of the cost. Value, momentum, and quality loads are quite similar too.
Very interesting.....I hadn't known about those funds. What say you AQR fans? grap? lackey?
That Vanguard fund is news to me. Not sure what I think. The AQR fund has had a slightly higher small load otherwise they look pretty similar. AQR fund has about double the holdings. AQR funds tend to be formulaic with patient trading. Not sure about this VG fund. Could this mean there is more manager risk? One can usually tell by low turnover if they follow more rules based investing but with momentum strategies it leads to higher turnover which is also similar between these 2 funds.

I'm limited in my US SCV holdings to VSIAX so I don't have to think about it too much. If my options were wide open I'd probably divide up that part of my portfolio 1/3 each of VBR, DFSVX, and QSMLX. This would be to minimize tracking error regret within SCV and avoid selling low and buying high within this space as sometimes the returns can be quite different.
Most of the factor nuts here (myself included) prefer IJS/VIOV, the S&P600 Value index etfs, to VBR for purer exposure to both Value and Small. Why don't you?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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