Allan Roth, CPA, CFP, is one of the most respected fee-only advisors that I know. He is also a regular contributor to the "Financial Planning" newsletter for independent advisors. These are quotes from what he told them in a recent article about Vanguard's new factor-based ETFs:
Vanguard to Launch 6 Factor Based ETFs"These are technically active funds rather than index funds."
"All funds will have a 0.13% annual expense ratio with the exception of the multifactor funds, which will have a 0.18% expense ratio."
"Over the past few years, factor-based investing has generally underperformed the broader market, according to Morningstar."
"Like smart beta funds, I consider these new Vanguard funds to be viable low-cost active strategies. But active investing is a zero-sum game before costs, and some fail. They especially fail when too much money chases the same factors. For years, I’ve been critical of the Vanguard Market Neutral fund (VMNFX) which, according to Morningstar, has delivered a 10-year annualized return of 0.41%, less than the Vanguard Prime Money Market (VMMFX) 10-year annualized return of 0.53%. (Both numbers are as of November 28, 2017.) The fund returned less than cash but with far more volatility, illustrating just how hard it is to beat the market."
"I have no plans to buy or recommend either smart beta or the Vanguard factor funds, even though they are viable active strategies. I’ve found the guarantee that comes with market-cap indexing has a huge psychological advantage. William Sharpe’s simple paper, “The Arithmetic of Active Management,” proves a broad market-cap-weighted portfolio must outperform active portfolios as a whole in the same asset class because of lower costs. Neither smart beta nor the Vanguard factor funds offer this guarantee though, and of course, any equity fund can lose money."
"The urge to beat the market is so strong — I don’t worry about markets becoming inefficient anytime soon."
Happy New Year!