Vanguard factor funds slow to catch on

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Rick Ferri
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Vanguard factor funds slow to catch on

Post by Rick Ferri » Mon Apr 23, 2018 7:55 am

Follow the money? What money? There is no money.

You’d think with all the hype about factor investing and Vanguard’s entry into the arena with six actively managed factor funds that investors would be flocking to them. It’s not happening. Asset flows into most of Vanguard’s new funds have been the equivalent of a B movie flop.

Cynthia Murphy of ETF.com reports that Vanguard Active ETFs are Slow to Grow. Two months since inception, four of the six Vanguard active factor funds have seen zero net asset inflows. ZERO. They are the Vanguard U.S. Liquidity Factor ETF (VFLQ), the Vanguard U.S. Minimum Volatility ETF (VFMV), the Vanguard U.S. Quality Factor ETF (VFQY) and the Vanguard U.S. Value Factor ETF (VFVA). Only one ETF—the Vanguard U.S. Multifactor ETF (VFMF)—has seen a marginal $11 million in net creations since mid-February. What's going on?

Vanguard is blaming adviser’s lack of education about the funds for the slow start. That could be true, but I’m speculating the marketing department at Vanguard is doing some back-peddling. The company bit off more than they can chew if they expect these actively managed factor funds to flourish based solely on flows from advisers. Here is why:

As a former investment adviser who recommended many Vanguard index funds to clients, I positioned Vanguard as an "indexing empire" with founder Bogle sitting at the throne. They were the first, arguably the best, and generally the cheapest. Want indexing? Go to Vanguard.

Factor investing was a different animal. When factors funds went into a portfolio they came from Dimensional Fund Advisors (DFA) or another factor fund provider. In fact, for a long time DFA was considered a factor fund empire with Fama/French sitting at the throne. They were arguably the first, the best, maybe not the cheapest, but not bad. Want factors? Go to DFA.

Now Vanguard is telling advisers they are the new place to come for factor investing. They are saying, “You trusted us with index funds, now trust us with factor investing.” In other words, “We are all things in all asset classes and in all investment strategies.” Well, we’ll see how that goes.

For the record, I still prefer fund companies in the specialty they’re known for. Vanguard for index funds and DFA or one of the other factor specially fund companies for factor investing.

Good luck to Vanguard in this new endeavor. The jury will be watching and listening.

Rick Ferri
Last edited by Rick Ferri on Mon Apr 23, 2018 11:26 am, edited 7 times in total.
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Re: Vanguard factor funds slow to catch on

Post by AlohaJoe » Mon Apr 23, 2018 9:29 am

As a mostly Boglehead who is also mostly convinced about factors, I've been a bit surprised that Vanguard's messaging for this new product didn't do a great job of making it sound appealing to me.

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Re: Vanguard factor funds slow to catch on

Post by afan » Mon Apr 23, 2018 9:37 am

Rick's analysis suggests that Vanguard reached out to advisors and expected a stronger response. Does anyone know?

The alternative explanation is that Vanguard investors don't buy the hype. If they wanted factor funds they would buy them from Vanguard. But they don't want factor funds.

Vanguard is probably right that, like whole life insurance, these products are sold not bought. Without an army of self interested "advisors" pushing them, there may few sales of this stuff. Vanguard may have to increase the expense ratios and kick some of that back to advisors to get much movement in the funds.

Wonder why people pick the most active fund, multifactor, as the one to buy?
Last edited by afan on Mon Apr 23, 2018 9:53 am, edited 1 time in total.
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Re: Vanguard factor funds slow to catch on

Post by ChinchillaWhiplash » Mon Apr 23, 2018 9:49 am

I'm tempted to buy some of the value fund, but on the fence with the super low volume and lack of $s in it. Seems like a great way to add a value tilt. How do they keep the ER so low for an actively managed fund? This is one of the most appealing variables of this fund.

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Re: Vanguard factor funds slow to catch on

Post by Random Walker » Mon Apr 23, 2018 10:04 am

Maybe they are slow to catch on because there are better products available. Each of the funds that have no net inflows focus on a single factor. It is more efficient to use core funds or funds with multi factor screens, then add on the single factor funds to get the specific factor exposure desired. Building a portfolio with each of the single factor funds would surely result in one fund buying a stock and another fund in the same portfolio selling the stock. Perhaps investors are showing some savvy by net inflows to the multi factor fund only.
For example, I believe SV equity funds from DFA also screen for momentum and profitability. And these VG funds are long only equities. Get much more pure and deep factor exposure by investing long-short across multiple factors and multiple asset classes as AQR does with their much more expensive funds. So, as always, there are trade offs between costs and depth of factor exposure, pure ness of factor exposure, diversification of factor exposure across asset classes.

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Re: Vanguard factor funds slow to catch on

Post by Random Walker » Mon Apr 23, 2018 10:07 am

ChinchillaWhiplash wrote:
Mon Apr 23, 2018 9:49 am
I'm tempted to buy some of the value fund, but on the fence with the super low volume and lack of $s in it. Seems like a great way to add a value tilt. How do they keep the ER so low for an actively managed fund? This is one of the most appealing variables of this fund.
It really depends on one’s definition of active. Because it’s not tracking a specific index, VG seems to have elected to describe this as an active fund. They are using a formulaic rules based approach, which by many people’s definition would be passive. Passive if agnostic to stock selection and no market timing. From what I read in the overview, sounds quite passive to me.

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Re: Vanguard factor funds slow to catch on

Post by lack_ey » Mon Apr 23, 2018 10:50 am

Technically I posted this four days ago, but that thread got no responses so no reason to merge the two. I'll just quote myself.

viewtopic.php?t=247524

Part of the post above:
lack_ey wrote:
Thu Apr 19, 2018 10:13 am
For reference, iShares Edge MSCI USA Value Factor ETF (VLUE) launched in 2013 has $3.4 billion AUM. Vanguard U.S. Value Factor ETF (VFVA) is still under $8 million.

For multifactor ETFs, Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) has $3.1 billion, iShares Edge MSCI Multifactor USA ETF (LRGF) has $1.0 billion, and John Hancock Multifactor Large Cap ETF (JHML) that's run by DFA has $0.4 billion, among others. Vanguard U.S. Multifactor ETF (VFMF) has $27 million in the ETF shares.

That said, late comers have had trouble gaining acceptance, not just Vanguard, even when backed by big names. PowerShares Multi-Factor Large Cap Portfolio (GMFL) launched in June 2017 (under the Guggenheim name; Guggenheim's ETF business was bought by PowerShares and most Guggenheim ETFs have subsequently been rebranded) is struggling with $1.4 million. PIMCO RAFI Dynamic Multi-Factor U.S. Equity ETF (MFUS) launched in August 2017 has $70 million.

As for what Rick says here:
Rick Ferri wrote:
Mon Apr 23, 2018 7:55 am
Factor investing was a different animal. When factors funds went into a portfolio they came from Dimensional Fund Advisors (DFA) or another factor fund provider. In fact, for a long time DFA was considered a factor fund empire with Fama/French sitting at the throne. They were arguably the first, the best, maybe not the cheapest, but not bad. Want factors? Go to DFA.

Now Vanguard is telling advisers they are the new place to come for factor investing. They are saying, “You trusted us with index funds, now trust us with factor investing.” In other words, “We are all things in all asset classes and in all investment strategies.” Well, we’ll see how that goes.

For the record, I still prefer fund companies in the specialty they’re known for. Vanguard for index funds and DFA or one of the other factor specially fund companies for factor investing.
That's kind of the impression I got with respect to their identity in the advisor community. By the way, do you know anything about this Advisors Choice awards or other surveys?

https://www.advisorperspectives.com/art ... heir-peers


As I noted above, iShares and some others are doing quite a lot better with factor ETFs. I wonder if people think Vanguard actively managing these or using an index is an advantage or disadvantage. Personally I'd say it's an advantage and I don't imagine most would have something against it, but I wonder if that could have anything to do with the pickup as well.

As I looked at a month ago in this following thread, Vanguard's funds seem to have deeper factor exposure than most. Going by portfolio stats, for example the value fund is deeper value than the DFA products, so do people really know what they want?

viewtopic.php?t=244016

afan wrote:
Mon Apr 23, 2018 9:37 am
The alternative explanation is that Vanguard investors don't buy the hype. If they wanted factor funds they would buy them from Vanguard. But they don't want factor funds.
I wonder if anybody has good insight into who "Vanguard investors" are. What percentage of Vanguard's AUM is institutional? What percentage is via financial advisors? What percentage is DIY investors? A number of DIY investors are Vanguard investors in the sense of only investing with Vanguard, while I expect the institutional and advisor clients to be more likely to use a mix of fund shops.

Who owns Vanguard's other quantitative equity team funds? These are heavily into what's effectively factor investing, though they have other signals as well. Global Minimum Volatility has $2.3 billion. Managed Payout (okay, people don't think of it as a quant fund and it's not really) has $2.1 billion. Strategic Equity has $7.2 billion. Strategic Small-Cap Equity has $1.7 billion. U.S. Value (not the factor ETF) has $1.6 billion. Market Neutral has $1.3 billion.

Or these legacy assets or what? Have advisors put clients in these but not the factor funds?

There's billions of AUM in factor products, billions in factor ETFs specifically, billions in Vanguard funds managed by the same people as these factor ETFs, yet basically nobody is buying the factor ETFs.

afan wrote:
Mon Apr 23, 2018 9:37 am
Wonder why people pick the most active fund, multifactor, as the one to buy?
I don't know, in some ways it's the least active. If you define "active" as looking at the most things, maybe being the most complex, I suppose it might be. But with respect to active share and measures of deviance from passively owning the market such as tracking error, it could be the least active. That's what you get when you blend multiple signals. You could think of it as the most diversified in terms of factor exposures, or taking relatively smaller bets on multiple factors, rather than trying to go all-in on one non-market factor (with market factor being unavoidable in long-only format). It's the least complex also in a sense for investors to manage, if they want to target multiple factors. It's a one-stop shop.

ChinchillaWhiplash wrote:
Mon Apr 23, 2018 9:49 am
I'm tempted to buy some of the value fund, but on the fence with the super low volume and lack of $s in it. Seems like a great way to add a value tilt. How do they keep the ER so low for an actively managed fund? This is one of the most appealing variables of this fund.
It's quant-only, they don't need to pay analysts, and they're Vanguard and don't need to mark up the prices. They just came up with some value measures to use, and they can just run the sort and tell the traders what to get. In fact, part of the savings here is being active in the sense that they don't have to pay a 3rd party licensing fees for some fancy index.

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Re: Vanguard factor funds slow to catch on

Post by triceratop » Mon Apr 23, 2018 10:57 am

lack_ey wrote:
Mon Apr 23, 2018 10:50 am
Technically I posted this four days ago, but that thread got no responses so no reason to merge the two. I'll just quote myself.

viewtopic.php?t=247524
Thanks for the link and for your thoughts; I always enjoy your posts. Normally I would merge these topics as the source material is the same, but Rick's post serves as an excellent "top level" post which should spark discussion. Carry on..
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Re: Vanguard factor funds slow to catch on

Post by IlliniDave » Mon Apr 23, 2018 11:13 am

I'm going to take the plunge on the US Multifactor soon.

There's been almost no retail marketing of these things as far as I can tell, and they are hard to find logged in as an individual investor on the website. They don't show up on the equity fund rosters under "investment products", for example. I needed Google to find them. It's almost like they are discouraging individual investors

I just don't have sufficient reason to cough up money to a middle man to get into DFA, although sans that extra layer of cost I would seriously consider it.
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Re: Vanguard factor funds slow to catch on

Post by Independent George » Mon Apr 23, 2018 11:13 am

I think most of the people who are most interested in factor investing also tend to be the kind of people who would rather handle it themselves.

I have mixed opinions about factor investing. I think the idea is sound, but suspect (pure speculation on my part) it's one of those cases where, simply because enough people have now heard of factor investing and started to re-weight their portfolios accordingly, it seems more likely to underperform in the future.

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Re: Vanguard factor funds slow to catch on

Post by Chan_va » Mon Apr 23, 2018 11:20 am

For those of you using Vanguard's Personal Advisory Services (PAS) have they started pitching a factor strategy? That would seem to be the easiest way for Vanguard to get these funds off the ground.

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Factor Funds ?

Post by Taylor Larimore » Mon Apr 23, 2018 11:24 am

Vanguard factor funds slow to catch on
Bogleheads:

In my opinion, this is a good thing. You can read "why" from this earlier post:
Bogleheads:

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 also reflects results from my Three-Fund Portfolio post.
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite." -- Jack Bogle
"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
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 2017 study by Tom Allen and Mark Hebner found: (16 funds) have underperformed their respective benchmarks since inception and only 8 funds outperformed.
"Profitable strategies, if they exist at all, do not last for very long. As soon as they are discovered, they are acted upon by the investment community bidding up the price of the relevant assets, thus eliminating their excess return." -- Bill Bernstein in The Intelligent Asset Allocator
Wall Street has a particular fetish for inventing unnecessarily complicated ways of achieving simple goals. Most other professions, so far as I can tell, are more comfortable offering simple ways to do simple things. On Wall Street, complicated ways to do simple things have bigger payoffs — for Wall Street, that is. So complexity proliferates, and it gets encrusted with jargon to impress investors into thinking there’s something special about it. -- Jason Zweig, author and Wall Street Journal columnist
Smart Beta Is Making This Strategist Sick

Factor Investing. What Went Wrong?

Best wishes.
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Re: Vanguard factor funds slow to catch on

Post by nedsaid » Mon Apr 23, 2018 11:26 am

I might have interest in these products. It really is a brilliant stroke on Vanguard's part, do it yourself investors who want to factor tilt can get DFA like products without paying an advisor for access. Vanguard has just fired a big shot across Dimensional Fund Advisors' bow. It will be interesting to see how DFA will respond.
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Re: Vanguard factor funds slow to catch on

Post by Rick Ferri » Mon Apr 23, 2018 11:31 am

Chan_va wrote:
Mon Apr 23, 2018 11:20 am
For those of you using Vanguard's Personal Advisory Services (PAS) have they started pitching a factor strategy? That would seem to be the easiest way for Vanguard to get these funds off the ground.
Maybe stick them in LifeStrategy funds as well, like they did with their international bond fund when it first came out.

:P (That was a cheap shot. Sorry, VG!)

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Re: Vanguard factor funds slow to catch on

Post by cfs » Mon Apr 23, 2018 11:33 am

Thank you Mister Ferri for this conversation. As far as the factor things, they will catch on soon, all of them wil in included in the future (balanced) "Vanguard Factor Target Retirement Series" --- Good luck, y gracias por leer ~cfs~
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Re: Vanguard factor funds slow to catch on

Post by AlohaJoe » Mon Apr 23, 2018 11:34 am

lack_ey wrote:
Mon Apr 23, 2018 10:50 am
Part of the post above:
lack_ey wrote:
Thu Apr 19, 2018 10:13 am
For reference, iShares Edge MSCI USA Value Factor ETF (VLUE) launched in 2013 has $3.4 billion AUM. Vanguard U.S. Value Factor ETF (VFVA) is still under $8 million.
The Goldman Sachs U.S. multifactor was a late entry (2016?) and still got above $3 trillion. Maybe that sucked out all of the "low expenses" air and is causing Vanguard to struggle? Or maybe it is just an example of Goldman doing a much better job marketing to advisors.

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Re: Vanguard factor funds slow to catch on

Post by lack_ey » Mon Apr 23, 2018 11:45 am

AlohaJoe wrote:
Mon Apr 23, 2018 11:34 am
lack_ey wrote:
Mon Apr 23, 2018 10:50 am
Part of the post above:
lack_ey wrote:
Thu Apr 19, 2018 10:13 am
For reference, iShares Edge MSCI USA Value Factor ETF (VLUE) launched in 2013 has $3.4 billion AUM. Vanguard U.S. Value Factor ETF (VFVA) is still under $8 million.
The Goldman Sachs U.S. multifactor was a late entry (2016?) and still got above $3 trillion. Maybe that sucked out all of the "low expenses" air and is causing Vanguard to struggle? Or maybe it is just an example of Goldman doing a much better job marketing to advisors.
Also despite having some of the weakest factor loads, basically zero tracking error, given the construction methodology (N different single-factor subportfolios of 1/N weighting each, starting from market cap). Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) top holdings are literally Apple, Microsoft, Amazon, JPMorgan Chase, Facebook Johnson & Johnson, Alphabet C, Alphabet A, Intel, and Exxon Mobil. IIRC supposedly Goldman's own clients were asking for this kind of product, so some demand was organic. The low fees surely did help with gaining wider recognition, and even people like Larry Swedroe have written about it in passing in articles as an example of "hey, factor/multifactor investing is not expensive" even though the loads here are so low.

It launched 2015-09-21. And I think you mean billion, not trillion.

nedsaid wrote:
Mon Apr 23, 2018 11:26 am
I might have interest in these products. It really is a brilliant stroke on Vanguard's part, do it yourself investors who want to factor tilt can get DFA like products without paying an advisor for access. Vanguard has just fired a big shot across Dimensional Fund Advisors' bow. It will be interesting to see how DFA will respond.
Based on fund flows, looks like they shot a soggy napkin that promptly disintegrated into the seas. I don't know if anybody needs to respond to that.

btw the only factor they offer that others didn't already in ETF format is the (low) liquidity. Vanguard U.S. Liquidity Factor ETF (VFLQ). And that's one of the ETFs that has gotten zero creation units.

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Re: Vanguard factor funds slow to catch on

Post by Whakamole » Mon Apr 23, 2018 12:09 pm

afan wrote:
Mon Apr 23, 2018 9:37 am
Wonder why people pick the most active fund, multifactor, as the one to buy?
Because you may believe in factors but don't know which factor is the one to bet on, so why not buy the fund that invests in all of them?
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%.
To be fair, we are comparing a small-cap value fund (currently 92% small cap, 42% SCV) to a total market fund which is dominated by large-cap stocks (6% small cap, 2% SCV.)

A fairer comparison would be VISVX, Vanguard Small Cap Value Index. I plugged both of these into Google Finance and from February 4, 2000 to April 20, 2018 the total returns have been:
VISVX: 282.40% return
PSVCX: 45.25% return

VISVX leans more mid-cap so it's still not an ideal comparison, and this only looks at the value premium.

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Re: Vanguard factor funds slow to catch on

Post by lack_ey » Mon Apr 23, 2018 1:30 pm

Interestingly it looks like WisdomTree is looking to launch international factor ETFs also without indexes, nominally actively managed.

http://www.etf.com/sections/daily-etf-w ... r-approach

WisdomTree Global Multifactor Fund
WisdomTree International Multifactor Fund
WisdomTree Emerging Markets Multifactor Fund
WisdomTree seeks to identify global equity securities that have the highest potential for returns based on proprietary measures of valuation, quality, and technical factors.
"Technical factors" likely means return or price momentum and related signals.

They add dynamic currency hedging on top of that based on momentum / value (based on PPP) / carry signals, which they already apply to some funds, such as WisdomTree Dynamic Currency Hedged International Equity Fund (DDWM). That's slightly beaten the non-hedged version (DWM) since inception in January 2016 despite USD falling. The hedging ranges between 0-100% for currency pairs based on those signals, rather than being 100% hedged all the time or 0%.

Hedging EM currency would be more expensive, though.

As the article notes, WisdomTree launched WisdomTree U.S. Multifactor Fund (USMF) last year, which still has AUM under $6 million despite WisdomTree being a fairly well known issuer and known for non-vanilla-beta approaches. Vanguard's beating somebody!

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Re: Vanguard factor funds slow to catch on

Post by Random Walker » Mon Apr 23, 2018 2:16 pm

cfs wrote:
Mon Apr 23, 2018 11:33 am
Thank you Mister Ferri for this conversation. As far as the factor things, they will catch on soon, all of them wil in included in the future (balanced) "Vanguard Factor Target Retirement Series" --- Good luck, y gracias por leer ~cfs~
That’s pretty funny :-) but there is also a valuable point to be made about retirement, factors, and diversification across factors. The factors tend to be uncorrelated with one another, and that lack of correlation can be especially beneficial to smooth out sequence of returns risk in the years immediately before retirement and in early retirement.

Dave

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Re: Vanguard factor funds slow to catch on

Post by cfs » Mon Apr 23, 2018 2:39 pm

Random Walker wrote:
Mon Apr 23, 2018 2:16 pm
. . . there is also a valuable point to be made about retirement, factors, and diversification across factors . . .
Thank you Mister Dave, good luck with those factor things, y gracias por leer ~cfs~
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Re: Vanguard factor funds slow to catch on

Post by lazyday » Mon Apr 23, 2018 6:10 pm

lack_ey wrote:
Mon Apr 23, 2018 1:30 pm
Interestingly it looks like WisdomTree is looking to launch international factor ETFs also without indexes, nominally actively managed.

http://www.etf.com/sections/daily-etf-w ... r-approach

.... dynamic currency hedging
Some international and especially EM funds have fallen behind their indexes by significantly more than ER, probably due to trading costs. With no index, maybe a fund can trade more patiently and cut hidden costs. But with no index, it would be difficult for an investor to estimate those costs.

Adding dynamic hedging both adds costs and makes it even more challenging to estimate total costs.

I probably wouldn't even consider these funds until they've been around for a decade or so. I don't know enough about WisdomTree to be willing to invest blindly.

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Re: Vanguard factor funds slow to catch on

Post by arcticpineapplecorp. » Mon Apr 23, 2018 6:21 pm

Rick Ferri wrote:
Mon Apr 23, 2018 7:55 am
Only one ETF—the Vanguard U.S. Multifactor ETF (VFMF)—has seen a marginal $11 million in net creations since mid-February.
That's an eerie coincidence. Jack writes:
By then, total assets of the Vanguard index funds had reached $18 billion, a remarkable growth from $11 million when we formed the first (Index 500) portfolio of Vanguard Index Trust in 1975.
source: https://www.vanguard.com/bogle_site/lib/sp19970401.html
Granted $11 million in 1975 is way more in inflation adjusted dollars than $11 million is today (you know that old saying, "$11 million isn't what it used to be" :happy )

Point being, the S&P500 index fund started out small and took time to catch on. I suppose it might be too soon to throw in the towel for Vanguard's new factor funds.

While Vanguard may be competing with DFA,I remember Larry Swedroe saying Vanguard's Value and Small cap funds weren't as "valuey" or as "small" as DFAs. Is it possible Vanguard's factor funds aren't as deep in the profitability, qualify, volatility, etc. as DFA's funds?

So while Vanguard's funds may be cheaper are they capturing the factors as well as DFA?

I have no dog in this hunt. I haven't compared the factor loadings of DFA and Vanguard's new funds. What do others think about the comparisons?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Vanguard factor funds slow to catch on

Post by lack_ey » Mon Apr 23, 2018 6:35 pm

lazyday wrote:
Mon Apr 23, 2018 6:10 pm
lack_ey wrote:
Mon Apr 23, 2018 1:30 pm
Interestingly it looks like WisdomTree is looking to launch international factor ETFs also without indexes, nominally actively managed.

http://www.etf.com/sections/daily-etf-w ... r-approach

.... dynamic currency hedging
Some international and especially EM funds have fallen behind their indexes by significantly more than ER, probably due to trading costs. With no index, maybe a fund can trade more patiently and cut hidden costs. But with no index, it would be difficult for an investor to estimate those costs.

Adding dynamic hedging both adds costs and makes it even more challenging to estimate total costs.

I probably wouldn't even consider these funds until they've been around for a decade or so. I don't know enough about WisdomTree to be willing to invest blindly.
Hedging less than 100% doesn't add any more costs than hedging 100% (it's less), like we see in plenty of many longer-running funds or something like Vanguard's total international bond index fund.

WisdomTree is publicly listed, which I think is generally not a good sign, but I think they're relatively well regarded. They're the 7th largest ETF issuer by AUM, and four of the ones ahead are known most for relatively low cost, market index-type funds primarily (Blackrock's iShares brand, Vanguard, State Street Global Advisor's SPDRs, Charles Schwab). I don't particularly think too much of them positively or negatively but I'm surprised at a skeptical stance. They're established, if nothing else. One of their early investors and their so-called Senior Investment Strategy Advisor is Wharton's Jeremy Siegel (Stocks for the Long Run), which I don't think means much but that is somewhat well known.

Maybe one of the most common funds people use to attempt to get emerging markets small cap value exposure is WisdomTree Emerging Markets SmallCap Dividend Fund (DGS), if you've heard mention of that.

Measuring tracking error in international funds is a bit difficult based on how indexes calculate taxation and how funds operate paying taxes where appropriate in different countries. They use "net return" indexes as benchmarks but that's not necessarily 100% accurate to what a fund will see or consistent between providers.

In any case, I'm not particularly interested in these specifically. I was looking at it from the angle of what Vanguard has done with the factor funds, making those actively managed. They seem to be potentially filling a void in that product lineup, though this is a tough area as factor funds have not been able to gather as much AUM in international stocks, for whatever reason. I also wish Vanguard would publish attributions for these funds and some further information, but they don't typically do that.

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Re: Vanguard factor funds slow to catch on

Post by jhfenton » Mon Apr 23, 2018 6:52 pm

arcticpineapplecorp. wrote:
Mon Apr 23, 2018 6:21 pm
Point being, the S&P500 index fund started out small and took time to catch on. I suppose it might be too soon to throw in the towel for Vanguard's new factor funds.

While Vanguard may be competing with DFA,I remember Larry Swedroe saying Vanguard's Value and Small cap funds weren't as "valuey" or as "small" as DFAs. Is it possible Vanguard's factor funds aren't as deep in the profitability, qualify, volatility, etc. as DFA's funds?

So while Vanguard's funds may be cheaper are they capturing the factors as well as DFA?

I have no dog in this hunt. I haven't compared the factor loadings of DFA and Vanguard's new funds. What do others think about the comparisons?
I think the multifactor VFMF and VFMFX are doing well. VFMF is at $27.45 MM in assets according to ETF.com, and VFMFX had another $18.2 MM as of 3/31/18. Presumably the two combined are now over $50 MM.

The question is how well the single-factor funds will catch on. They are off to a slow start, but I think folks will eventually catch on to the unique construction.

By all appearances, Vanguard's factor funds have very high factor loads. They explicitly weight by factor score, rather than by market cap, and they all wind up about 1/3 large, 1/3 mid, 1/3 small. I would guess that the single-factor ETFs have higher factor loads than any existing ETFs. And I would guess that they have factor loads comparable to DFA's mutual funds. They have none of the usual constraints put on funds to minimize tracking error.

Disclaimer: I own VFMFX and VFVA. (Volume on VFVA is very light, but it has a consistent $0.06/0.08% spread. I would normally not even give a second's thought to buying an ETF with $7.5 MM in assets, but it's Vanguard, and I don't think the ETF is going anywhere. But I still wouldn't buy it in taxable.)

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Re: Vanguard factor funds slow to catch on

Post by stlutz » Mon Apr 23, 2018 7:01 pm

Leaving aside the question of whether factor tilting is a good idea, I think these VG funds are an excellent way to do it, for the reasons jfhenton just stated (had to rewrite my post as a result!).

Vanguard's real competition here isn't really DFA as much as it is iShares, who already has pretty-darn-low cost offerings in this area. Personally, I think VG's are better in terms of construction (i.e. I like VFVA better than VLUE, VFMV better than USMV etc.). But, it's going to take a while to catch up in terms of AUM.

Their muni bond ETF was slow to accumulate assets as well. It's now up to 2.6B.

I still find it strange how difficult they make it to find information about these ETFs on their website, however. What is the point of "hidden" ETFs?

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Re: Vanguard factor funds slow to catch on

Post by whodidntante » Mon Apr 23, 2018 7:19 pm

Don't worry about a thing. Because every little thing's gonna be alright.

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Re: Vanguard factor funds slow to catch on

Post by UpperNwGuy » Mon Apr 23, 2018 7:26 pm

Could it be that the Vanguard factor funds are slow to catch on because most Vanguard investors are there for the broad, low-cost index funds and are simply not interested in factors? I know that description fits me. I don't see myself ever owning a factor fund, either at Vanguard or elsewhere.

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Re: Vanguard factor funds slow to catch on

Post by UpperNwGuy » Mon Apr 23, 2018 7:38 pm

stlutz wrote:
Mon Apr 23, 2018 7:01 pm
Their muni bond ETF was slow to accumulate assets as well. It's now up to 2.6B.
Are you talking about VTEB? If so, I think it is having a hard time competing with Vanguard's Intermediate-Term Tax-Exempt Fund (VWITX/VWIUX).

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Re: Vanguard factor funds slow to catch on

Post by Rick Ferri » Mon Apr 23, 2018 7:57 pm

My take on Vanguard factor funds is the same as their international bond fund and their muni bond ETF; Vanguard investors were buying elsewhere, so offer them a quality competing product at a low fee. It’s not as though Vanguard expects this strategy to be its future.
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Re: Vanguard factor funds slow to catch on

Post by vencat » Mon Apr 23, 2018 8:47 pm

I have both Intermediate Tax exempt and Muni bond ETF.
This is the reason, as provided by Oblivious Investor:

"But I think the two most likely uses for the new fund will be:

As a tax-loss harvesting partner for the existing fund, and
As a low-commission option for people who invest via brokerage firms other than Vanguard (and who would be able to buy a Vanguard ETF at a lower commission than an open-end Vanguard mutual fund)."

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Re: Vanguard factor funds slow to catch on

Post by jhfenton » Mon Apr 23, 2018 9:32 pm

stlutz wrote:
Mon Apr 23, 2018 7:01 pm
I still find it strange how difficult they make it to find information about these ETFs on their website, however. What is the point of "hidden" ETFs?
It seems clear from Vanguard's limited marketing that they see them primarily as tools for advisors to construct portfolios for clients. They've mostly hidden their non-CRSP (S&P and Russell) index ETFs for years, so I'm not too surprised that they're hiding the factor ETFs on the Vanguard consumer site. I predicted that they would have something like an "Active" ETF filter checkbox like the existing "S&P and Russell" checkbox that would show the ETFs if you knew where to look. They haven't even done that yet.

On the mutual funds page, they have a section labeled "Factor Driven Strategies". But the only fund listed is the pre-existing Global Minimum Volatility fund. I don't know why they haven't added the Multifactor fund there.

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Re: Vanguard factor funds slow to catch on

Post by CULater » Mon Apr 23, 2018 9:39 pm

Whole lotta factor squeezing going on here. Will there be any juice left? I guess that's the risk you get.
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Re: Vanguard factor funds slow to catch on

Post by AlohaJoe » Mon Apr 23, 2018 9:47 pm

lack_ey wrote:
Mon Apr 23, 2018 1:30 pm
As the article notes, WisdomTree launched WisdomTree U.S. Multifactor Fund (USMF) last year, which still has AUM under $6 million despite WisdomTree being a fairly well known issuer and known for non-vanilla-beta approaches. Vanguard's beating somebody!
The 0.28% ER for a US-only fund probably didn't help, especially when iShares' multifactor is 0.20% and was out first.

I think one problem all these factor funds have is their fund companies are completely terrible at marketing. Go to WisdomTree's (or iShares or Vanguard or Goldman Sachs or John Hancock's) page on their fund and try to figure out how they convince you their fund is any better or different than the half dozen competitors. Maybe it is because of SEC constraints? Or maybe they just have never hired a modern marketing team? I dunno.

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Re: Vanguard factor funds slow to catch on

Post by fennewaldaj » Mon Apr 23, 2018 9:51 pm

What is the normal speed ETFs grow? It seems like the multifactor fund is gathering assets at a reasonable rate. The other ones less so but it has been pointed out they started with more $ in shares than other ETFs One thing about these funds is if advisers and factor tilting DIY investors are likely used to having separate small cap and large cap funds. I might take a while to figure out how to use these in a persons portfolio. You can't just switch out your current say large value fund for the value factor fund for example.

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Re: Vanguard factor funds slow to catch on

Post by triceratop » Mon Apr 23, 2018 9:52 pm

CULater wrote:
Mon Apr 23, 2018 9:39 pm
Whole lotta factor squeezing going on here. Will there be any juice left? I guess that's the risk you get.
The factor funds being slow to catch on is evidence that there is squeezing occurring? What would your conclusion be if the adoption were more rapid? Is there a set of facts that doesn't lead to your conclusion?
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Re: Vanguard factor funds slow to catch on

Post by james22 » Mon Apr 23, 2018 10:01 pm

Because I'm a value investor first.

I'd love to be mostly multifactor, but not at market highs.
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Re: Vanguard factor funds slow to catch on

Post by fennewaldaj » Mon Apr 23, 2018 10:05 pm

Given the way these are constructed with positions all the way into the microcaps current shareholders would not want these funds to get too big correct? LIke maybe 1 billion in assets might be optimal but not 10 billion.

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Re: Vanguard factor funds slow to catch on

Post by whodidntante » Mon Apr 23, 2018 11:08 pm

It's because Merrill Edge has decided to block the Vanguard factor ETFs. Vanguard accounted for many factors but they missed the Merrill bull factor. :)

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Re: Vanguard factor funds slow to catch on

Post by Dead Man Walking » Tue Apr 24, 2018 12:34 am

These funds will attract assets when their performance warrants it. Money talks and bs walks!

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Re: Vanguard factor funds slow to catch on

Post by JoMoney » Tue Apr 24, 2018 2:13 am

Slow to attract investors? Maybe they'll start slipping it into the LifeStrategy and Target Retirement date funds. :twisted:
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Re: Vanguard factor funds slow to catch on

Post by lazyday » Tue Apr 24, 2018 4:33 am

On WisdomTree multifactor funds
lack_ey wrote:
Mon Apr 23, 2018 6:35 pm
Hedging less than 100% doesn't add any more costs than hedging 100% (it's less),
I figure that hedging adds costs, and dynamic hedging would make estimating total costs especially difficult.
I'm surprised at a skeptical stance
I feel that for a fund where I can’t estimate total costs, I need either a long track record (DFA) or a lot of faith in the company (Vanguard). Especially for a non-cap weighted EM or international fund.

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Re: Vanguard factor funds slow to catch on

Post by lazyday » Tue Apr 24, 2018 4:38 am

lack_ey wrote:
Mon Apr 23, 2018 6:35 pm
Measuring tracking error in international funds is a bit difficult based on how indexes calculate taxation and how funds operate paying taxes where appropriate in different countries. They use "net return" indexes as benchmarks but that's not necessarily 100% accurate to what a fund will see or consistent between providers.
Are you saying that for some funds, reported NAV and index “Total Return” are after taxes? I assumed that both were before taxes, with all pretax dividends reinvested.

WisdomTree DGS reports annualized Total Returns since inception:
4.80% Index
3.68% NAV

Some of that difference is from fund expenses. Some might be from stale pricing, but with over 10 years of data, this portion should be small. Some might be from holding different assets than the index. And some is from hidden trading costs, which can be quite high for EM smallcap.

Might some of the difference be from taxes paid by the fund, with unequal tax adjustments made to the index and NAV reported?

If you know of an example where tax adjustments to total returns are explained in fund documents, please let me know. From a quick look at the DGS semiannual report, I didn’t spot anything in the performance summary.

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Re: Vanguard factor funds slow to catch on

Post by dkturner » Tue Apr 24, 2018 8:03 am

I did a comparison of the Vanguard Multifactor mutual fund (VFMFX) with the DFA Core fund (DFTCX) and found them to be close in composition. The Vanguard Fund has a larger allocation to small- cap stocks and is slightly more “Valuey”. It will be interesting to see how the two funds perform going forward.
Last edited by dkturner on Tue Apr 24, 2018 9:34 am, edited 1 time in total.

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Re: Vanguard factor funds slow to catch on

Post by Rick Ferri » Tue Apr 24, 2018 9:16 am

My view of how to use factor funds in a portfolio differs from most. I do a "barbell" approach. Start with VTI or similar very cheap total market fund and supplement it with the most value intensive, small-cap intensive, momentum intensive, quality intensive fund you can find and don't worry too much about the fee.

How much in each? It depends on each investor. The factor fund should range from 10% to 50% to have a meaningful effect (if it works). My preference is 75% total market, 25% factor fund. That's enough to gain a benefit if there is one without hurting me too much if there isn't.

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Re: Vanguard factor funds slow to catch on

Post by aristotelian » Tue Apr 24, 2018 9:39 am

Could catch on with time, these are still new products.

Still, I think there is a bit of cognitive dissonance for VG investors. We have been told for years that low cost indexing is the way to go, and it has been successful for us. It would almost be like Apple selling a budget phone, or Chipotle selling burgers. The product would go against the raison-d'etre of the brand.
Last edited by aristotelian on Tue Apr 24, 2018 9:40 am, edited 1 time in total.

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Re: Vanguard factor funds slow to catch on

Post by Random Walker » Tue Apr 24, 2018 9:40 am

I agree with Rick’s statement above. By taking the barbell approach, one accomplishes a couple of things. First of all, by using more of the cheap total market/core fund, you are keeping expenses low. By using the factor fund with deep factor exposure, the investor is using less of this more expensive factor fund to get the tilts he wants. Lastly, the point of tilting to factors for most of us is to diversify away from market beta. By using a factor fund that is heavily tilted, the investor is taking on less market beta to get the exposures he wants: more efficient.

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Re: Vanguard factor funds slow to catch on

Post by lack_ey » Tue Apr 24, 2018 11:30 am

lazyday wrote:
Tue Apr 24, 2018 4:33 am
On WisdomTree multifactor funds
lack_ey wrote:
Mon Apr 23, 2018 6:35 pm
Hedging less than 100% doesn't add any more costs than hedging 100% (it's less),
I figure that hedging adds costs, and dynamic hedging would make estimating total costs especially difficult.
I'm surprised at a skeptical stance
I feel that for a fund where I can’t estimate total costs, I need either a long track record (DFA) or a lot of faith in the company (Vanguard). Especially for a non-cap weighted EM or international fund.
Okay, that makes a lot of sense then.

lazyday wrote:
Tue Apr 24, 2018 4:38 am
lack_ey wrote:
Mon Apr 23, 2018 6:35 pm
Measuring tracking error in international funds is a bit difficult based on how indexes calculate taxation and how funds operate paying taxes where appropriate in different countries. They use "net return" indexes as benchmarks but that's not necessarily 100% accurate to what a fund will see or consistent between providers.
Are you saying that for some funds, reported NAV and index “Total Return” are after taxes? I assumed that both were before taxes, with all pretax dividends reinvested.

WisdomTree DGS reports annualized Total Returns since inception:
4.80% Index
3.68% NAV

Some of that difference is from fund expenses. Some might be from stale pricing, but with over 10 years of data, this portion should be small. Some might be from holding different assets than the index. And some is from hidden trading costs, which can be quite high for EM smallcap.

Might some of the difference be from taxes paid by the fund, with unequal tax adjustments made to the index and NAV reported?

If you know of an example where tax adjustments to total returns are explained in fund documents, please let me know. From a quick look at the DGS semiannual report, I didn’t spot anything in the performance summary.
I'm saying that international funds pay taxes to many of the underlying countries. That's why US holders of these funds get a foreign tax credit to account for taxes that the fund already paid to other countries—so that amount isn't double taxed when the US shareholder pays US taxes based on distributions received from the fund.

These are not calculated adjustments for a given fund but a reality of what has actually happened.

The total return reported is net of the taxes the fund already paid to other countries. However, the benchmark indexes used are net return as well, and also attempt to adjust for what they estimate to be taxes that need to be paid at that stage. If anything there is a tendency for index providers to be pessimistic in tax assumptions in terms of what a fund would have to pay, offering perhaps an easier target to beat.

Certainly with EM small cap, trading costs are relatively high and you expect some tracking error from not being able to run full replication frictionlessly. There's no issuer who could escape that. I don't have insight on how well or poorly WisdomTree might manage that, but I don't expect them to be particularly worse than a Vanguard or iShares. DFA could have some advantage based on not following an index, but now that's the route taken by Vanguard and now WisdomTree with the new international multifactor funds.

aristotelian wrote:
Tue Apr 24, 2018 9:39 am
Could catch on with time, these are still new products.

Still, I think there is a bit of cognitive dissonance for VG investors. We have been told for years that low cost indexing is the way to go, and it has been successful for us. It would almost be like Apple selling a budget phone, or Chipotle selling burgers. The product would go against the raison-d'etre of the brand.
Vanguard themselves talk about low-cost investing, among other things. Haven't you seen all their slides about potential benefits of active management? They've not been telling people only to use index funds, though in places they will say it is the proper starting baseline.

And how does this square with the hundreds of billions in AUM they have in active products?

I guess it makes sense if you're talking about people who were told from many sources (not necessarily Vanguard themselves) that low-cost indexing and Vanguard was the way to go. This group hardly seems like the target market, though.

Vanguard is going after financial advisors, many of which are not Vanguard-focused exclusively, those who consider products from any issuer. They need to sell an idea to these folks that what they're doing is better... which they've failed at so far.

They could also pull AUM from those already invested in other Vanguard active funds (these are cheaper) and other specialty products, though I don't think they're interested in cannibalizing themselves.

I don't really get brand loyalty in general so maybe I have the wrong ideas.

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Re: Vanguard factor funds slow to catch on

Post by bschultheis » Tue Apr 24, 2018 1:33 pm

Rick Ferri wrote:
Mon Apr 23, 2018 7:57 pm
My take on Vanguard factor funds is the same as their international bond fund and their muni bond ETF; Vanguard investors were buying elsewhere, so offer them a quality competing product at a low fee. It’s not as though Vanguard expects this strategy to be its future.

Good observation Rick. Vanguard has reached out to RIAs to introduce these funds. To Vanguard's credit (and I'm sure folks at DFA would say the same) they also handed out a presentation "For Financial Advisors only, Not for Public Distribution" and listed the four "factors" that actually matter. They are, in descending order . . .

1. Save More
2. Work Longer
3. Spend Less
4. Reduce Investment Cost

I just love all this factor / smart beta stuff. Makes my life so much easier, because it gets investors to focus on irrelevant things, thinking that these things actually matters in the big picture of reaching financial goals.

Bill

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Re: Vanguard factor funds slow to catch on

Post by Rick Ferri » Tue Apr 24, 2018 3:05 pm

bschultheis wrote:
Tue Apr 24, 2018 1:33 pm
I just love all this factor / smart beta stuff. Makes my life so much easier, because it gets investors to focus on irrelevant things, thinking that these things actually matters in the big picture of reaching financial goals.

Bill
+1
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