How to use Vanguard's value factor ETF?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Kelly
Posts: 377
Joined: Sun Nov 18, 2012 7:39 am

How to use Vanguard's value factor ETF?

Post by Kelly »

Hi All

I've followed a value tilted portfolio based on a portfolio from Bill Bernstein's Four Pillars for about 15 years now. As he admits in Rational Expectations, the Vanguard large cap value index has not returned as much of the value premium as DFAs large value. Vanguard now has a value factor fund (VFVA created 3/2018) with a heavier value weighting but much smaller than their large cap value. How would I use it? I first thought of substituting it for large and small value funds but it's more volatile.

Here's the current portfolio to which I've added small international which wasn't available when he wrote the book:

20% US large (VTI)
20% US large value (VIVAX)
10% US small value (VISVX)
10% total international (VXUS)
10% international value (EFV)
5% international small (VSS)
5% Emerging
20% total bond mkt

While the value exposure of VFVA is higher, so is it's standard deviation. These are the annualized 1 year standard deviations:
VFVA 42%
Small value (VISVX) 38%
Large value (VIVAX) 27%

A math whizz could likely create a "synthetic" VFVA for back testing using the Ken French data. I'm not that person.

All opinions welcome!

Kelly
muffins14
Posts: 443
Joined: Wed Oct 26, 2016 4:14 am

Re: How to use Vanguard's value factor ETF?

Post by muffins14 »

Personally, I wouldn't do too much backtesting because I'm lazy, and would just think about overall factor loading and cost:

1) check the factor loadings of your VIVAX and VISVX in the 2:1 ratio (comes to about 0.07 SMB, 0.37 HML, -0.08 MOM). Since it's 60% of your US equity, your overall HML loading is about 0.22

2) check the factor loadings of VFA (not much data, but portfolio visualizer shows 0.38 SMB, 0.55 HML, -0.24 MOM)

So, you're getting more value and size, as you mentioned.

This means you could get similar factor loadings for the US part of your portfolio with: X * 0.55 = 0.22, where X is the portion if your US equity that would go to VFVA. So now you'd need 30% to VTI and 20% to VFVA to get the same HML exposure as 20% VTI + 30% in your funds.

Are there any advantages to that path? Maybe. You'd have more loading on size, which may have higher expected return when controlling for other factors.

The VFVA path may also be more expensive since VFVA has a fee of 0.14% and VISVX is 0.07% and VIVAX 0.05% when using admiral shares, so you'd need the extra factor loading on small to pay off, and hope the negative momentum isn't a drag.

Personally, I use FNDA in taxable and SLYV in tax-deferred, mainly because I irrationally(?) avoid negative momentum
Topic Author
Kelly
Posts: 377
Joined: Sun Nov 18, 2012 7:39 am

Re: How to use Vanguard's value factor ETF?

Post by Kelly »

muffins14 wrote: Tue Jan 12, 2021 3:17 pm

This means you could get similar factor loadings for the US part of your portfolio with: X * 0.55 = 0.22, where X is the portion if your US equity that would go to VFVA. So now you'd need 30% to VTI and 20% to VFVA to get the same HML exposure as 20% VTI + 30% in your funds.
Very helpful. Many thanks!
User avatar
grabiner
Advisory Board
Posts: 28713
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: How to use Vanguard's value factor ETF?

Post by grabiner »

I use VFVA for both my large-cap and small-cap value allocations, treating it as 50% large-cap and 50% small-cap. (I don't have mid-cap as a separate class in my asset allocation.) Thus, when VFVA came out, I sold all my Value Index and Small-Cap Value Index to buy it in my Roth IRA.

The standard deviation of VFVA should be higher, because it holds much deeper exposure to the value factor; when value does well or poorly, this fund will do very well or very poorly. But you don't care much about the standard deviation of any individual fund; you care about how it relates to the risk of your portfolio. The value risk is not signficantly correlated with the market, international, or small-cap risks which you are also taking.

(I use IVLU and AVDV for my international value, rather than EFV. IVLU is less expensive than EFV and also has better factor exposure; AVDV seems to be the best way to get small-cap international value.)
Wiki David Grabiner
Topic Author
Kelly
Posts: 377
Joined: Sun Nov 18, 2012 7:39 am

Re: How to use Vanguard's value factor ETF?

Post by Kelly »

Thanks Dave. I wasn't aware of IVLU. Surprisingly EFV has a higher value coefficient assuming I'm using and reading this correctly? https://tinyurl.com/y58pkaez

I also use AVDV in place of the VSS I had been using.
freyj6
Posts: 308
Joined: Thu Jun 19, 2014 2:09 am

Re: How to use Vanguard's value factor ETF?

Post by freyj6 »

It's an interesting fund. Like others have said, it's value exposure is a lot deeper than most of Vanguard's value funds. Given how big value-growth spreads have gotten, that's probably a good thing.

Size wise, it's a mid-cap fund, but it's spread almost evenly between small, medium and large.

If you wanted all 3 of those in your portfolio in roughly equal allocation, then VFVA seems like a good choice.
Post Reply