Vanguard moves into smart beta with actively managed factor ETFs

Dec 10th, 2015 | By | Category: Equities

Vanguard, the world’s second largest exchange-traded fund provider, has expanded its low-cost ETF range with the launch of its first active ETFs on the London Stock Exchange. The funds are designed to provide broad, globally diversified equity exposure with tilts to investment factors including value, momentum, volatility and liquidity. These strategies have historically provided improved risk-adjusted returns.

Vanguard moves into smart beta with actively managed smart beta ETFs

Vanguard’s actively managed ETFs offer low-cost exposure to smart beta factors such as value, momentum, volatility and liquidity.

The four ETFs pursue what Vanguard refers to as an actively managed investment strategy. The quantitative rules-based nature of the new funds bears much similarity to smart beta ETFs already available; however, they differ in that they do not seek to track an index. By instead following a strategy unique to each fund the ETFs are described as actively managed.

The new ETFs will be managed by Vanguard’s Quantitative Equity Group, which has been serving as an investment adviser for Vanguard portfolios since 1991 and is responsible for $24bn in assets across 18 investment strategies.

John James, Managing Director for Vanguard in Europe, said: “Today’s launch reinforces Vanguard’s commitment to offering UK investors high-value, low-cost active and index funds.  Vanguard has successfully managed active funds in the US for more than forty years and we have nearly $1tn in active assets under management. Since entering the UK market over six years ago, we have focused on giving investors a better chance of investment success. This launch demonstrates our belief in low-cost, broadly diversified active managed strategies to help achieve that.”

According to Vanguard, there is a significant amount of empirical research that has found exposure to factors, such as value, momentum, liquidity and volatility, can offer investors attractive premiums over the long term. There may also be periods of underperformance that investors should expect when taking active risk.

In seeking to achieve each fund’s investment objective, Vanguard uses a proprietary quantitative model to evaluate a broad investment universe of equity securities from the FTSE Developed All Cap Index and the Russell 3000 Index.

The Vanguard Global Value Factor UCITS ETF (VVAL) aims to capture the potential premiums of low-valued stocks, which are stocks that look inexpensive compared with the company’s fundamentals. This is achieved by favouring equity securities that, when compared to other securities in the investment universe, have lower prices relative to their fundamental measures of value (e.g. price-to-book or price-to-earnings ratio, estimated future earnings and operating cash flow).

The Vanguard Global Momentum Factor UCITS ETF (VMOM) aims to capture the momentum premium through focusing on stocks with strong recent share price performance, typically over the previous twelve months. Such stocks have been found to continue to outperform over the subsequent short- to medium- term time periods.

The Vanguard Global Liquidity Factor UCITS ETF (VLIQ) aims to capture the liquidity premium by investing in stocks that are less frequently traded and could be a source of outperformance over the long-term. This is achieved by favouring equity securities that, when compared to other securities in the investment universe, have low trading volumes and other measures of trading liquidity, including lower trading share and dollar volumes, based on percentage turnover, and price impact

The Vanguard Global Minimum Volatility UCITS ETF (VMVL) aims to help investors reduce risk in their portfolios. Investing in a portfolio that targets a combination of stocks with lower volatility compared with the broader market allows investors to maintain exposure to equities with the potential for improving risk-adjusted returns.

Axel Lomholt, Head of Product for Vanguard’s International business, commented: “We believe these ETFs offer a compelling alternative to high-cost active strategies that target similar exposures. Vanguard has chosen to take an active approach to managing these funds by using quantitative models to select stocks and build a portfolio that targets the desired factor whereas other managers may track an index to implement a factor-based strategy. Investors need to be confident that the methodology chosen will deliver their desired factor exposure to meet long-term investment objectives.”

The four Vanguard ETFs have been listed on the London Stock Exchange and each carry ongoing charges of 0.22% per annum.

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