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

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

Post by cfs » Wed Nov 29, 2017 10:58 pm

Good.

Now Vanguard can close all their DUMB BETA funds.

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

Post by lack_ey » Wed Nov 29, 2017 11:15 pm

cfs wrote:
Wed Nov 29, 2017 10:58 pm
Good.

Now Vanguard can close all their DUMB BETA funds.

Wishing you a Merry Christmas, and thanks for reading.
FWIW Vanguard doesn't use the term "smart beta" anywhere I see. They just call them factor funds and the strategy factor investing, and say that it's one way of taking active risk in the market. I think that's fair enough, whatever you think of the likely performance.

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

Post by MrPotatoHead » Wed Nov 29, 2017 11:39 pm

IMO, this amounts to financial porn. And like in the porn industry, the majority of excitement is in the hot new thing.

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

Post by cfs » Wed Nov 29, 2017 11:45 pm

lack_ey wrote:
Wed Nov 29, 2017 11:15 pm
. . . FWIW Vanguard doesn't use the term "smart beta" anywhere I see . . .
Thanks for the note.

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

Post by GreatOdinsRaven » Thu Nov 30, 2017 12:43 am

lack_ey wrote:
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
Interested to see how their momentum fund will be constructed. I currently use the iShares momentum fund, MTUM. Will we be dependent on running 4 factor regressions in one or two or three years and comparing the their factor loadings, since the Vanguard fund will the (quant) active (seemingly with a process that’s not published)?

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

Post by sunnywindy » Thu Nov 30, 2017 5:58 pm

GreatOdinsRaven wrote:
Thu Nov 30, 2017 12:43 am
lack_ey wrote:
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
Interested to see how their momentum fund will be constructed. I currently use the iShares momentum fund, MTUM. Will we be dependent on running 4 factor regressions in one or two or three years and comparing their factor loadings, since the Vanguard fund will the (quant) active (seemingly with a process that’s not published)?

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

Post by LadyGeek » Thu Nov 30, 2017 6:56 pm

Gus Sauter gave a presentation on Smart Beta at the 2015 Bogleheads Conference: Bogleheads® 15 - Philadelphia

Direct link to slides: What really is smart β, September 30, 2016

Audio: Smart Beta (audio), produced by digarei.

His conclusion:
An Efficient Tilt to Mid-Cap Value
* Invest core holding in broad market
* Complimented by investment in capitalization weighted mid cap value portfolio
* Adjust the balance between the two investments to provide greater or lesser exposure to tilt

What really is smart β
- Smart Marketing
(Typo - Complimented should be Complemented.)
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by lack_ey » Thu Nov 30, 2017 7:22 pm

LadyGeek wrote:
Thu Nov 30, 2017 6:56 pm
Gus Sauter gave a presentation on Smart Beta at the 2015 Bogleheads Conference: Bogleheads® 15 - Philadelphia

Direct link to slides: What really is smart β, September 30, 2016

Audio: Smart Beta (audio), produced by digarei.

His conclusion:
An Efficient Tilt to Mid-Cap Value
* Invest core holding in broad market
* Complimented by investment in capitalization weighted mid cap value portfolio
* Adjust the balance between the two investments to provide greater or lesser exposure to tilt

What really is smart β
- Smart Marketing
(Typo - Complimented should be Complemented.)
That presentation (at least the slides; did not check the audio) is about RAFI fundamental indexing in the second half, with those conclusions pertaining to that. That's maybe the best known strategy under the smart beta label.* He's not the only one noting that the (primary) effect of fundamental indexing is producing a value tilt, also a bit to size.

*definitions of smart beta are not consistent, so some lump cap-weighted factor funds into smart beta, while others only consider non-cap-weighted funds to be in that category. Fundamental indexing weighted by fundamentals and not market cap, so it's usually understood by most to be called smart beta.

Most of these upcoming Vanguard ETFs do not invest based on fundamentals-to-price ratios, and will not have underlying exposures that could be largely replicated by some tilts with market-cap-weighted value (or mid cap value, small cap value, etc.) funds or other such slicings.

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

Post by triceratop » Thu Nov 30, 2017 7:44 pm

lack_ey wrote:
Thu Nov 30, 2017 7:22 pm
LadyGeek wrote:
Thu Nov 30, 2017 6:56 pm
Gus Sauter gave a presentation on Smart Beta at the 2015 Bogleheads Conference: Bogleheads® 15 - Philadelphia

Direct link to slides: What really is smart β, September 30, 2016

Audio: Smart Beta (audio), produced by digarei.

His conclusion:
An Efficient Tilt to Mid-Cap Value
* Invest core holding in broad market
* Complimented by investment in capitalization weighted mid cap value portfolio
* Adjust the balance between the two investments to provide greater or lesser exposure to tilt

What really is smart β
- Smart Marketing
(Typo - Complimented should be Complemented.)
That presentation (at least the slides; did not check the audio) is about RAFI fundamental indexing in the second half, with those conclusions pertaining to that. That's maybe the best known strategy under the smart beta label.* He's not the only one noting that the (primary) effect of fundamental indexing is producing a value tilt, also a bit to size.

*definitions of smart beta are not consistent, so some lump cap-weighted factor funds into smart beta, while others only consider non-cap-weighted funds to be in that category. Fundamental indexing weighted by fundamentals and not market cap, so it's usually understood by most to be called smart beta.

Most of these upcoming Vanguard ETFs do not invest based on fundamentals-to-price ratios, and will not have underlying exposures that could be largely replicated by some tilts with market-cap-weighted value (or mid cap value, small cap value, etc.) funds or other such slicings.
Agreed on the focus being on RAFI there. If not, it would also be amusing since Gus states "If you want to take a factor bet, make the factor bet transparent" and "Beware of many non standard 'indexes' that accomplish the same tilts--e.g. equal weighted S&P is ad hoc way to take small cap bet". It's funny because MCV is an ad hoc way to get exposure to the size factor, so why not make the bet transparent and go SCV.
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by avalpert » Thu Nov 30, 2017 8:17 pm

triceratop wrote:
Thu Nov 30, 2017 7:44 pm
It's funny because MCV is an ad hoc way to get exposure to the size factor, so why not make the bet transparent and go SCV.
I don't think MCV is an ad hoc way to get exposure to the size factor - it just depends on how much size exposure you want to get for about the same value exposure as SCV funds (at least comparing say VOE and IJS).

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

Post by GreatOdinsRaven » Thu Nov 30, 2017 9:24 pm

avalpert wrote:
Thu Nov 30, 2017 8:17 pm
triceratop wrote:
Thu Nov 30, 2017 7:44 pm
It's funny because MCV is an ad hoc way to get exposure to the size factor, so why not make the bet transparent and go SCV.
I don't think MCV is an ad hoc way to get exposure to the size factor - it just depends on how much size exposure you want to get for about the same value exposure as SCV funds (at least comparing say VOE and IJS).
I was at Gus’s presentation. His slides have overlayed returns charts for PRF (RAFI US 1000 PowerShares “Index”) and VOE (Vanguard Mid-Cap Value “Index”). They essentially look the same. If you run the factor regressions they’re not weighted the same and yet they have performed essentially the same way. Gus makes the point that part of Vanguard’s relative outperformance compared to PRF is because its ER is lower.
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by avalpert » Thu Nov 30, 2017 9:29 pm

GreatOdinsRaven wrote:
Thu Nov 30, 2017 9:24 pm
avalpert wrote:
Thu Nov 30, 2017 8:17 pm
triceratop wrote:
Thu Nov 30, 2017 7:44 pm
It's funny because MCV is an ad hoc way to get exposure to the size factor, so why not make the bet transparent and go SCV.
I don't think MCV is an ad hoc way to get exposure to the size factor - it just depends on how much size exposure you want to get for about the same value exposure as SCV funds (at least comparing say VOE and IJS).
I was at Gus’s presentation. His slides have overlayed returns charts for PRF (RAFI US 1000 PowerShares “Index”) and VOE (Vanguard Mid-Cap Value “Index”). They essentially look the same. If you run the factor regressions they’re not weighted the same and yet they have performed essentially the same way. Gus makes the point that part of Vanguard’s relative outperformance compared to PRF is because its ER is lower.
I don't know what to make of that comparison - looking at the factor loading you are trading off size exposure for value exposure so is there a reason we should expect their tradeoffs to end in similar outcomes? For what it is worth, neither had a meaningful alpha in the 3-factor regression.

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

Post by GreatOdinsRaven » Thu Nov 30, 2017 9:31 pm

Did you listen to the audio?

Would you expect an index fund to have Alpha? I wouldn’t.
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by avalpert » Thu Nov 30, 2017 9:32 pm

GreatOdinsRaven wrote:
Thu Nov 30, 2017 9:31 pm
Did you listen to the audio?

Would you expect an index fund to have Alpha? I wouldn’t.
I would if I was suggesting that factors don't explain the performance of the funds - the lower ER gives it a performance advantage that would show up as alpha.

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

Post by GreatOdinsRaven » Thu Nov 30, 2017 9:34 pm

avalpert wrote:
Thu Nov 30, 2017 9:32 pm
GreatOdinsRaven wrote:
Thu Nov 30, 2017 9:31 pm
Did you listen to the audio?

Would you expect an index fund to have Alpha? I wouldn’t.
I would if I was suggesting that factors don't explain the performance of the funds - the lower ER gives it a performance advantage that would show up as alpha.
Why would one expect that factors wouldn’t explain the performance of the “index” fund?

Did you listen to Gus’s talk? If not it’s not really worth discussing what he was saying.
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by avalpert » Thu Nov 30, 2017 9:43 pm

GreatOdinsRaven wrote:
Thu Nov 30, 2017 9:34 pm
avalpert wrote:
Thu Nov 30, 2017 9:32 pm
GreatOdinsRaven wrote:
Thu Nov 30, 2017 9:31 pm
Did you listen to the audio?

Would you expect an index fund to have Alpha? I wouldn’t.
I would if I was suggesting that factors don't explain the performance of the funds - the lower ER gives it a performance advantage that would show up as alpha.
Why would one expect that factors wouldn’t explain the performance of the “index” fund?
I would expect factor exposure to explain nearly all the performance of all funds, index or otherwise. What does it being an index have to do with it?

That said, you are the one that commented on the different factor exposure of PRF and VOE yet similar performance. I simply noted that they have different factor exposure, one has higher size exposure and one value exposure so having similar outcomes doesn't necessarily tell me anything at all about whether one had 'unexpected' outperformance relative to the other - if that did indeed happen I would expect that to show up as alpha in the factor regression.

[OT comment removed by admin LadyGeek]

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

Post by patrick013 » Fri Dec 01, 2017 5:06 pm

Even "beta" has a confidence interval. Somewhat inclined to
take a look and forget about it. I still like the total return
column for general indexes.
age in bonds, buy-and-hold, 10 year business cycle

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

Post by nedsaid » Sat Dec 02, 2017 9:24 pm

bowest wrote:
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.
Wow. The HMS Vanguard did a lot of damage to Fidelity and is now training its guns on Dimensional Fund Advisors. Vanguard also has its own advisory service, taking aim at independent advisors. Vanguard has its own brokerage arm. Vanguard has its own market neutral funds. Cliff Asness and AQR also need to take notice.

My guess is that competitors will have to beat Vanguard on quality and service but will not be able to compete on price.

This is also another argument against indexing causing the market to become inefficient. It appears that Vanguard might be able to keep markets efficient all by itself. It has low-cost active funds, low-cost factor funds, low cost market neutral funds, and then its index funds. Vanguard is now competing against itself in the stock market!
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by cfs » Sat Dec 02, 2017 9:34 pm

Ha!

The bottom line is this, every other company out there better learn how to speak Vanguardish [or else].

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

Post by patrick013 » Sun Dec 03, 2017 5:01 pm

Not being a RIA or an institutional investor guess I'd have
to choose something like these if interested.

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

Post by jhfenton » Sun Dec 03, 2017 6:02 pm

patrick013 wrote:
Sun Dec 03, 2017 5:01 pm
Not being a RIA or an institutional investor guess I'd have
to choose something like these if interested.

Invesco - Factor Investing
All of these ETFs and the fund will be available to retail investors. The ETFs are simply *targeted* at RIAs.

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Factor Investing

Post by Taylor Larimore » Sun Dec 03, 2017 8:36 pm

Bogleheads:

After more than 50 years of investing, I have seen many investment fads come and go. This is an earlier post I wrote about "factors":
Factor Investing:

In recent years, the investment industry has begun talking about "factors" as a way to beat the market. According to this MSCI paper, there are six "factors": Value, Low size, Low volatility, High yield, Quality and Momentum (I wonder why "Low-cost" was not included). According to MSCI (which provides data for the financial industry): "these factors are grounded in academic research and have solid explanations as to why they historically have provided a premium."

I am skeptical, primarily because nearly all academic research about investing is based on past performance which experienced investors and the government warn us against.

I have also learned from experience (and professor Burton Malkiel) who wrote: "The very popularity of any investment style will sow the seeds of its own destruction." I well remember the popularity of Penny stocks, Day Trading, the "Nifty-Fifty," Dogs of the Dow, IPOs, Commodities, etc..

This 2003 post of mine, containing an article, PREDICTING THE PAST recalls the "factors" of earlier days.

I am confident that every mutual fund manager knows about "factors" and many managers use them. Nevertheless, the majority of fund managers underperform simple broad market index funds.

Aswarth Damodaran, NYU Professor and author of 20+ finance books: "Beating the market is never easy and anyone who argues otherwise is fighting history and ignoring the evidence."

A study by Rick Ferri & Alex Benke found that an all-index 3-fund market portfolio outperformed active portfolios 82.9% of the time during a 16-year period (1997-2012). That's good enough for me. It reflects results from my earlier Three-Fund Portfolio post.
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"You don’t need to constantly add new asset classes or investments just because investment firms keep bringing them out. In fact, if you do, you’re more likely to end up with an unwieldy hodge-podge of investments that’s difficult to manage rather than a simpler portfolio that more efficiently balances risk and return." -- Walter Updegrave, editor of MONEY magazine
The oldest multi-factor fund I could find is PNC Multi-Factor Small-Cap Value C (PSVCX). It's 15-year average return was 5.72%. Total Stock Market (VTSAX) 15-year average return was 7.63%.

AQR is noted for its factor funds. This study by Tom Allen and Mark Hebner found:

* 67% (16 AQR funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha.

*33% (8 AQR funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha.
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Best wishes.
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by Jebediah » Sun Dec 03, 2017 9:45 pm

triceratop wrote:
Wed Nov 29, 2017 4:30 pm
Doc wrote:
Wed Nov 29, 2017 4:05 pm
grap0013 wrote:
Wed Nov 29, 2017 2:34 pm
That chart is not right. It does not include dividends.
avalpert wrote:
Wed Nov 29, 2017 2:48 pm
Look closer, the chart is right even accounting for the Q3 dividend distributions.
Of course it's right. It is a price (NAV) chart. It is not supposed to include dividends. :D

The problem with the chart is that it is only for three months. That doesn't make it "not right". And the short time is because that is how long I've held IJS in taxable. It gained over 10% in three months for an annualized gain of some 120% even without the dividends. So I can't sell the damn thing without incurring a whole lot of short term gains. :(
Okay you three, settle down. :wink:

Here's the growth chart we've all been waiting for

Image

There is substantial outperformance even including dividends, of course, because the gap was so wide to begin with. At the same time, grap is right that over longer periods the difference hasn't materialized. Of course, we don't know what happened in 2000-2002 with VBR. Would be interesting to look up the index return! Note that VBR has changed indices repeatedly. That's another reason I dislike Vanguard's small value fund -- I can't rely on keeping the same factor exposure in taxable after accumulating large gains.

As Grap tries to point out, it is a total disservice to discuss factor funds on the basis of "performance". e.g. with value, I *want* the one that has underperformed because HML is negative over the trailing 11 years.

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

Post by Random Walker » Sun Dec 03, 2017 9:53 pm

Hi Taylor,
I agree with you that the market is ruthlessly efficient. But do you see a difference between the current popular factors which have academic evidence supporting them and the fads you are referring to? This is a serious question. At the time they were popular, did academics advocate them? Was there intuitive logic supporting them. These factors can all be accessed through passive vehicles. Your post seems to equate factor investing with active management. Lastly, I agree with your trepidation about basing decisions on past performance. But these factors have both past performance data and rational intuitive forward looking risk or behavioral explanations supporting most of them. Does this affect your view of them at all?

Dave

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Endless Controversy

Post by Taylor Larimore » Sun Dec 03, 2017 11:01 pm

Dave:

I respect your often stated opinion about factor investing. My reply, above, states my opinion about factor investing. I know that if I answer each of your questions it will lead to endless controversy (or worse) which I try to avoid.

There is more than one road to Dublin.

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

Post by triceratop » Mon Dec 04, 2017 1:36 am

Jebediah wrote:
Sun Dec 03, 2017 9:45 pm
As Grap tries to point out, it is a total disservice to discuss factor funds on the basis of "performance". e.g. with value, I *want* the one that has underperformed because HML is negative over the trailing 11 years.
I agree with grap, fwiw, but I don't see my post as being in contradiction with that.
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by cfs » Mon Dec 04, 2017 4:46 pm

Good question by Random Walker. Classic answer by Taylor Larimore. Wishing YOU and YOUR family a Merry Christmas, and thanks for reading.
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Re: Endless Controversy

Post by saltycaper » Mon Dec 04, 2017 6:14 pm

Taylor Larimore wrote:
Sun Dec 03, 2017 11:01 pm

There is more than one road to Dublin.
We're not bound for Dublin anymore. We're sculling up the Nung to find Colonel Kurtz.
Quod vitae sectabor iter?

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

Post by grog » Tue Dec 05, 2017 1:07 am

From an interview with Mr. Bogle:
InvestmentNews: What do you think of smart beta?

Mr. Bogle: I can't believe you asked me that.
http://www.investmentnews.com/article/2 ... -to-change

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

Post by Theoretical » Tue Dec 05, 2017 2:52 pm

triceratop wrote:
Mon Dec 04, 2017 1:36 am
Jebediah wrote:
Sun Dec 03, 2017 9:45 pm
As Grap tries to point out, it is a total disservice to discuss factor funds on the basis of "performance". e.g. with value, I *want* the one that has underperformed because HML is negative over the trailing 11 years.
I agree with grap, fwiw, but I don't see my post as being in contradiction with that.
One difference is that IJS is a bit of a closet multifactor fund in some distinct ways. One, its earnings requirements for index inclusion means it gets a major loading on the profitability and quality sides that provide some diversification to the value. But that same insistence on the company being profitable tilts the index as a whole to the value side of the equation, as even the growth side has a modest value tilt while the value side has a Growth at a Reasonable PrIce seasoning. Quality has done really well during this period, so it has offset the lower performance of the value side.

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

Post by lack_ey » Wed Dec 13, 2017 6:29 pm

=== Bumping old thread. Replies above this are 8+ days old ===


There's a recent interview with John Ameriks of Vanguard about these upcoming ETFs:
http://www.etf.com/sections/features-an ... nopaging=1
Hougan: Active strategies?

Ameriks: Yes, factors are active strategies.
Hougan: Vanguard announced plans to launch active factor ETFs in the U.S. Why go active?

Ameriks: There are multiple reasons, but the big one is philosophical: We wanted to make sure investors understood what they were getting.

Vanguard’s biggest concern with factor strategies is that, when you tell a client they’re investing in an index fund, they think they’re getting broad-based exposure to the market.

To the extent investors are trying to outperform or get an exposure that’s different from the market, we think that’s an active strategy. So, part of offering active ETFs is ensuring investors know they’re getting something different from the market as a whole.
It's interesting to me the way Vanguard is stressing that these are tools to implement an active strategy in terms of deviating from the market, though that's consistent with what they've said in the past (white papers, maybe other interviews). That comes up in some other sources as well, for example MSCI in a white paper saying that "factor portfolios on the other hand rebalance away from a neutral market cap starting point. As such,they represent an active view."

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

Post by Captain kangaroo » Wed Dec 13, 2017 8:37 pm

Can someone explain to a novice like me why one would choose the multifactor mutual fund over the TSM fund? And vise versa

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

Post by lack_ey » Wed Dec 13, 2017 9:01 pm

Captain kangaroo wrote:
Wed Dec 13, 2017 8:37 pm
Can someone explain to a novice like me why one would choose the multifactor mutual fund over the TSM fund? And vise versa
Are you asking something more along the lines of (1) why invest in a fund that does these things or (2) why invest in Vanguard's specific fund doing these things?

It's hard to answer the latter without knowing more details about the strategy, holdings, and so on. The fund hasn't even launched yet.

The answer to the former has to do with interpretations of stock market history, finance, and issues that many people spend lifetimes working on. Most people who know about the total market funds who choose to own something else are likely looking for potentially better return for a given amount of risk, or some other desirable properties for their situation. In most cases for a multifactor fund, this is a bet on forward-looking outperformance of certain types of stocks selected according to multiple different themes or criteria (call it a factor or style or something along those lines) that have had success in the past with some plausible underlying explanations for continuance. In most cases somebody is probably rejecting the idea that the market portfolio is most optimal ex ante, that other constructions are more likely to be better, and that the advantage is probably larger than the some 0.14% or so extra expense ratio in addition to the extra internal trading costs.

For some relatively easy reading I would start with a couple of industry white papers:
MSCI: Foundations of Factor Investing
Vanguard: Factor-based investing

and check the sticky thread:
viewtopic.php?f=10&t=7353

In a taxable account there are extra downsides of non-market investing, as funds can change strategies over the long run (or you could change your mind, or want to reallocate differently based on other options and accounts later), and maybe in ways you might not like, and you might have significant unrealized capital gains.

Obviously as with any idea there are rightfully a lot of skeptics, with varying degrees of skepticism. Also plenty who want something other than the market but prefer a different route there, or even a different mix of factors or fund construction methodology.

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The futility of trying to beat the stock market

Post by Taylor Larimore » Wed Dec 13, 2017 11:18 pm

Captain kangaroo wrote:
Wed Dec 13, 2017 8:37 pm
Can someone explain to a novice like me why one would choose the multifactor mutual fund over the TSM fund? And vise versa
Captain kangaroo:

I believe many of us at one time or another think we can "beat the market" because we have some special insight (promoted by the industry).

As Jack Bogle has shown, and as the highly regarded S&P Dow Jones SPIVA Reports show, there is ample evidence that even the most talented mutual fund managers, as a group, cannot beat the market indexes. If they can't beat their indexes, I have learned it is foolish for me to try.
"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." -- Jack Bogle
Best wishes.
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by tj » Mon Jan 01, 2018 11:56 pm

lack_ey wrote:
Wed Dec 13, 2017 6:29 pm
=== Bumping old thread. Replies above this are 8+ days old ===


There's a recent interview with John Ameriks of Vanguard about these upcoming ETFs:
http://www.etf.com/sections/features-an ... nopaging=1
Hougan: Active strategies?

Ameriks: Yes, factors are active strategies.
Hougan: Vanguard announced plans to launch active factor ETFs in the U.S. Why go active?

Ameriks: There are multiple reasons, but the big one is philosophical: We wanted to make sure investors understood what they were getting.

Vanguard’s biggest concern with factor strategies is that, when you tell a client they’re investing in an index fund, they think they’re getting broad-based exposure to the market.

To the extent investors are trying to outperform or get an exposure that’s different from the market, we think that’s an active strategy. So, part of offering active ETFs is ensuring investors know they’re getting something different from the market as a whole.
It's interesting to me the way Vanguard is stressing that these are tools to implement an active strategy in terms of deviating from the market, though that's consistent with what they've said in the past (white papers, maybe other interviews). That comes up in some other sources as well, for example MSCI in a white paper saying that "factor portfolios on the other hand rebalance away from a neutral market cap starting point. As such,they represent an active view."
This is strange. Something like Dividend Appreciation Index follows an index that was specficially created for the fund. Doesn't it deviate from the market? Why is it marketed as an index fund rather than an "active strategy"? :D

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

Post by cb474 » Tue Jan 02, 2018 4:01 am

triceratop wrote:
Wed Nov 29, 2017 4:30 pm
Here's the growth chart we've all been waiting for

Image

There is substantial outperformance even including dividends, of course, because the gap was so wide to begin with. At the same time, grap is right that over longer periods the difference hasn't materialized. Of course, we don't know what happened in 2000-2002 with VBR. Would be interesting to look up the index return! Note that VBR has changed indices repeatedly. That's another reason I dislike Vanguard's small value fund -- I can't rely on keeping the same factor exposure in taxable after accumulating large gains.
I guess I don't understand why people are focusing on this tiny period of time arbitrarily beginning on 9/1/17. Looking at IJS since its inception in 2000, compared to VBR/VSIAX/VISVX, you get this chart:

Image

Kind of starts to look like there's not much difference after all. And that's despite all of Vanguard's index changes.

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

Post by triceratop » Tue Jan 02, 2018 9:00 am

cb474 wrote:
Tue Jan 02, 2018 4:01 am
triceratop wrote:
Wed Nov 29, 2017 4:30 pm
Here's the growth chart we've all been waiting for

Image

There is substantial outperformance even including dividends, of course, because the gap was so wide to begin with. At the same time, grap is right that over longer periods the difference hasn't materialized. Of course, we don't know what happened in 2000-2002 with VBR. Would be interesting to look up the index return! Note that VBR has changed indices repeatedly. That's another reason I dislike Vanguard's small value fund -- I can't rely on keeping the same factor exposure in taxable after accumulating large gains.
I guess I don't understand why people are focusing on this tiny period of time arbitrarily beginning on 9/1/17. Looking at IJS since its inception in 2000, compared to VBR/VSIAX/VISVX, you get this chart:

Image

Kind of starts to look like there's not much difference after all. And that's despite all of Vanguard's index changes.
Because clearly there are substantial differences between the fund that can materialize, given by the substantial differences in performance this past year. Also, the close tracking over a long period does not mean the current index of VBR would perform as the fund did historically, in particular in 2000-2002.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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

Post by sls239 » Tue Jan 02, 2018 11:16 am

CULater wrote:
Tue Nov 28, 2017 10:21 pm
Just wondering -- who takes the other side of the trade on factor funds and why are they so dumb? Oh, I guess it's us market index fund investors...
I don't think it is the total market investors. I think it will be mostly other factor investors, and possibly doing so unwittingly.

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

Post by jhfenton » Tue Jan 02, 2018 1:25 pm

Back to the original topic :beer, is anyone else considering using the new funds right away? Unless I see something new that I don't like, I think I'm going to move my large cap IRA allocation into the Vanguard U.S. Multifactor Admiral or possibly split it between the Multifactor Admiral and Value Factor ETFs. I want to wait to see the initial portfolios, but I'm not going to wait the three years someone mentioned to see what the factor loadings are.

Based on the language in the prospectuses, they are going to be all-cap and sector neutral. What that means exactly remains to be seen. From the U.S. Multifactor Admiral Shares prospectus:
Security Selection

The Vanguard Group, Inc. (Vanguard), the Fund’s investment advisor, constructs a diversified portfolio that 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.

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 rankings 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.
The single-factor ETFs have the same "within each group" language.

It appears they are going to be available in mid-February. The Vanguard institutional notice said mid-February, which matches the effective date of February 13, 2018 in the SEC filing.

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

Post by lack_ey » Tue Jan 02, 2018 1:40 pm

jhfenton wrote:
Tue Jan 02, 2018 1:25 pm
Back to the original topic :beer, is anyone else considering using the new funds right away? Unless I see something new that I don't like, I think I'm going to move my large cap IRA allocation into the Vanguard U.S. Multifactor Admiral or possibly split it between the Multifactor Admiral and Value Factor ETFs. I want to wait to see the initial portfolios, but I'm not going to wait the three years someone mentioned to see what the factor loadings are.
Depends on what the initial portfolios are. There are a lot of existing multifactor funds, so just seeing top 10 holdings would give some indication of what it's doing relative to the others.

And really, you probably don't need 3 years to get a feel for factor loadings. Just download the daily return series for a few months (maybe not including the very beginning), and regress on daily factor data. It's not like you have to use the monthly data series.

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

Post by NoRoboGuy » Tue Jan 02, 2018 3:44 pm

In the end it is still noise even if it is Vanguard making it, and these tilts are not going to make a lot of difference. If you must, simply tilt to small and value factors.
There is no free lunch.

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

Post by cfs » Tue Jan 02, 2018 3:57 pm

jhfenton wrote:
Tue Jan 02, 2018 1:25 pm
. . . Back to the original topic :beer, is anyone else considering using the new funds right away? . . .
I have some space in my traditional IRA, currently filled by dumb product, planning to add some of the smart juice there and if it goes all the way to zero so be it. Good luck, and thanks for reading ~cfs~
~ Member of the Active Retired Force since 2014 ~

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

Post by pkcrafter » Tue Jan 02, 2018 4:31 pm

mindboggling wrote:
Tue Nov 28, 2017 11:26 am
Now, we'll all be able to outperform!
This post is pretty much on target. Of course it can't be true as mindboggling knows. The thing is everyone should know it.

I've been a Boglehead since running into Taylor Larimore and Mel Lindauer on the old M* Diehards forum 20 years ago. To me this factor stuff is pure marketing fodder. I'm not biting, and sometimes I think a good percentage of forum members aren't actually Bogleheads at all.

Look at mo. Yeah, that's what momentum is called by those who know. The idea of mo is to put money into those stocks or sectors that are accelerating and producing higher than market returns. Fine, but the end of a momentum run isn't pretty. Right now momentum is riding the total market, and TM index funds are already grabbing a good portion of it. But what's happening? Investors are getting nervous about momentum and total market index funds. Some are even getting out! As for the other factor strategies, total market provides exposure to those as well. If they are so good as to guarantee consistent higher returns, the market will fold them in and the advantage will disappear.

Beta, one of the Fama/French 3 factors, accounts for 70% of market returns. Add value and small factors and you are up to accounting for 90-95% of market returns. What are all the additional factors explaining, 5-10% of market returns? If you want to over emphasize value and small, go ahead, but keep in mind that it's clear that value and growth alternate, so growth should not be avoided all together. Small is rather shy and does not appear on a regular basis. To capture it you must put up with sometimes very long periods of total disinterest from this factor.

Everyone knows a low cost total market index fund outperforms about 80% of all other investing strategies over periods of 20 years, and that is not going to change! In fact, it cannot change by any meaningful percentage. So, the fact is that anyone trying some brilliant strategy faces odds of 4 to 1 that they won't beat the market, or to put it another way, you run an 80% chance of not beating the market. Not only that, but if your clever, higher cost strategy does not work, you not only don't get higher returns, you don't even get the market return.

I'm sticking with Taylor, who has never wavered in his recommendations. They are so easy to follow that most readers are not content to follow them.

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

Post by H-Town » Tue Jan 02, 2018 4:39 pm

mindboggling wrote:
Tue Nov 28, 2017 11:26 am
Now, we'll all be able to outperform!
Ugh... There won't be any value if Vanguard's big bag of cash is moving in value block. The expense will race up (ER, transaction fee, capital gain, impact fees, etc.). I guess the best bet now is keeping Total Stock and maintaining the lowest fee.

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

Post by bs1 » Tue Jan 02, 2018 9:04 pm

Vanguard Global Value Factor turnover is about 110%:
https://americas.vanguard.com/instituti ... ##overview

Vanguard Global MOM turnover is 242%:
https://americas.vanguard.com/instituti ... ##overview

Morningstar results seem consistent with these numbers.

Vanguard fund managers indicate this was anticipated:
“Turnover will be relatively high, with back testing showing rates of ~100%.”
https://www.fiduciawealth.co.uk/2017/01/qa-vanguard/

It seems Vanguard avoided the inefficiency of indexing only to closely track factor loads. Whatever the rationale, it may be better to keep these funds in a tax-sheltered account.

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

Post by jhfenton » Tue Jan 02, 2018 9:49 pm

pkcrafter wrote:
Tue Jan 02, 2018 4:31 pm
Everyone knows a low cost total market index fund outperforms about 80% of all other investing strategies over periods of 20 years, and that is not going to change! In fact, it cannot change by any meaningful percentage. So, the fact is that anyone trying some brilliant strategy faces odds of 4 to 1 that they won't beat the market, or to put it another way, you run an 80% chance of not beating the market. Not only that, but if your clever, higher cost strategy does not work, you not only don't get higher returns, you don't even get the market return.

I'm sticking with Taylor, who has never wavered in his recommendations. They are so easy to follow that most readers are not content to follow them.
I'd actually like to see the 20-year-period in which total stock has outperformed small cap value. It certainly hasn't been the last 20 years.

I've been heavily tilted to small value since 1998, and I've been very happy with my substantial outperformance over total stock. ($10,000 invested in VSIAX at its inception in 1998 has grown to $54,182.47. $10,000 in VTSAX has grown to $37,165.88.)

So I'm sticking with my apparently brilliant strategy, in which I have also never wavered. :beer

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

Post by Taylor Larimore » Tue Jan 02, 2018 10:03 pm

jhfenton wrote:
Tue Jan 02, 2018 9:49 pm
pkcrafter wrote:
Tue Jan 02, 2018 4:31 pm
Everyone knows a low cost total market index fund outperforms about 80% of all other investing strategies over periods of 20 years, and that is not going to change! In fact, it cannot change by any meaningful percentage. So, the fact is that anyone trying some brilliant strategy faces odds of 4 to 1 that they won't beat the market, or to put it another way, you run an 80% chance of not beating the market. Not only that, but if your clever, higher cost strategy does not work, you not only don't get higher returns, you don't even get the market return.

I'm sticking with Taylor, who has never wavered in his recommendations. They are so easy to follow that most readers are not content to follow them.
I'd actually like to see the 20-year-period in which total stock has outperformed small cap value. It certainly hasn't been the last 20 years.

I've been heavily tilted to small value since 1998, and I've been very happy with my substantial outperformance over total stock. ($10,000 invested in VSIAX at its inception in 1998 has grown to $54,182.47. $10,000 in VTSAX has grown to $37,165.88.)

So I'm sticking with my apparently brilliant strategy, in which I have also never wavered. :beer
jhfenton:

Ever hear of RTM (Reversion to the Mean)? I'd be scared to death. :happy

Mr. Bogle discusses RTM here:

The Telltale Chart

Happy New Year!
Taylor
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Re: Vanguard to launch US 'smart beta' ETFs - Will this board burn down?

Post by edge » Tue Jan 02, 2018 11:11 pm

What a waste of time.

They should add life strategy ETF share classes or do something else useful.

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

Post by lack_ey » Tue Jan 02, 2018 11:29 pm

Y
edge wrote:
Tue Jan 02, 2018 11:11 pm
What a waste of time.

They should add life strategy ETF share classes or do something else useful.
ETF shares for the fund-of-funds would be nice, yeah.

On a related note, now I'm wondering if this is the extent of their plans when they applied for the exemption to be able to run actively managed ETFs. People were hoping that they would offer ETF share classes for some existing active funds, like for example many of their low-cost muni funds (not to mention junk bonds, maybe some of the equity and balanced funds).

Perhaps if the new factor funds collect assets, they would launch international versions. But I do wonder about offering access to existing funds through ETF shares.

Actually, anybody have any bets on AUM for these ETFs in five years? Vanguard rarely/never seems to bother with anything that might attract less than $1 billion, but I think there's a very good chance a number of these could fall short of that.

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

Post by jhfenton » Wed Jan 03, 2018 8:42 am

Taylor Larimore wrote:
Tue Jan 02, 2018 10:03 pm
jhfenton:

Ever hear of RTM (Reversion to the Mean)? I'd be scared to death. :happy

Mr. Bogle discusses RTM here:

The Telltale Chart

Happy New Year!
Taylor
Happy New Year to you too!

What would scare me right now would be betting everything on a large-cap index. I'll stick with my relatively-cheap globally-diversified small-cap tilted portfolio. :beer

edge wrote:
Tue Jan 02, 2018 11:11 pm
What a waste of time.

They should add life strategy ETF share classes or do something else useful.
lack_ey wrote:
Tue Jan 02, 2018 11:29 pm
ETF shares for the fund-of-funds would be nice, yeah.
ETFs of the funds of funds (at least the life strategy funds) would make sense. It also came up in another thread recently. (I wouldn't invest in them, but they would be attractive for many investors.)

What I really want, though, is Admiral Shares for VSS/VFSVX (Vanguard FTSE all-World ex-US Small Cap). (Pretty please!)
lack_ey wrote:
Tue Jan 02, 2018 11:29 pm
On a related note, now I'm wondering if this is the extent of their plans when they applied for the exemption to be able to run actively managed ETFs. People were hoping that they would offer ETF share classes for some existing active funds, like for example many of their low-cost muni funds (not to mention junk bonds, maybe some of the equity and balanced funds).
I don't think adding ETFs to truly active funds (with discretionary management) is going to happen (at least not in the foreseeable future). To be honest, as an owner of the Vanguard Ohio Long-Term Tax Exempt, I wouldn't want the fund to change in the ways that would be necessary. (Costs being equal, I'm not a fan of index funds or ETFs in illiquid markets like munis or high yield.)
lack_ey wrote:
Tue Jan 02, 2018 11:29 pm
Perhaps if the new factor funds collect assets, they would launch international versions. But I do wonder about offering access to existing funds through ETF shares.

Actually, anybody have any bets on AUM for these ETFs in five years? Vanguard rarely/never seems to bother with anything that might attract less than $1 billion, but I think there's a very good chance a number of these could fall short of that.
The Value Factor and Multifactor funds will probably do very well. The Momentum Factor ETF will do well.

I'm curious to see whether the liquidity factor ETF will gather substantial (for Vanguard) assets. Vanguard has the existing Irish-domiciled ETF, but it's not a factor I've seen from other ETF providers.

I would be very interested in international value ETFs from Vanguard.

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