comeinvest wrote: ↑
Fri Apr 27, 2018 12:55 am
What precisely is a tangible benefit of the new VFVA (Vanguard US Value Factor ETF) vs. the old VBR (small cap value), mid cap value, large cap value, etc.?
The expense ratio of VFVA is about twice that of the old ETFs.
I gather that VFVA does not track an index, but on the other hand the relevant indexes (CRSP US Small Cap Value Index, etc.) are constructed to minimize turnover too, so I'm curious if there is a tangible benefit here.
Also, VFVA seems to follow a strict, rules based approach too. I'm not sure where exactly the "active" part comes into play, or if "active" is just Vanguard's terminology for "non-market cap" or "rules-based factor".
With the old ETFs, the investor has more control over the weighting of large/mid/small depending on individual preferences or overall portfolio.
Finally, I'm not sure if "deeper value" is necessarily a benefit. If deeper value was always better, as sometimes suggested in this forum, one could easily tweak the portfolio construction rules (weighting and cutoff numbers) to achieve arbitrary deep factor exposure, at no additional cost since the data and the computers are already there.
If you actually want "value" exposure, the new VFVA is a more concentrated take on it.
The CRSP value funds have fairly dilute value exposure for two main reasons: (1) They include 50% of the market by "value", so you are getting a lot of stocks with middling value characteristics. (2) They market cap weight the included stocks, potentially diluting the value exposure further.
I have no problem owning the CRSP funds. I own Vanguard Mid-Cap Value Index Admiral in my 401(k), and I have Vanguard Small-Cap Value Index Admiral in two of our retirement accounts. They offer a cheap and almost infinitely scalable mix of beta, value, and, for the mid and small funds, size factors. They have moderate tracking error to the popular indices people see on TV, so they may be easier for folks to hold on to.
Vanguard certainly could tweak the CRSP indexing rules to create "passive" funds with deeper value characteristics. They could limit the indices to 33% of the market by value and weight the holdings by the strength of their value characteristics rather than market cap.
At that point, though, if you simply gave the manager the discretion to determine when to rebalance the index, you'd essentially have the new "active" value factor ETF.
To be honest, if you aren't immediately excited by VFVA upon looking at its construction methodology and its portfolio characteristics, you shouldn't even consider it. It should not be sold
to anyone. There is a reason they are marketing them as a tool for advisors.