Vanguard US follows own European lead in factor funds

by , 28th February 2018

UK and European investors could be forgiven getting somewhat confused by the fanfare in the US over the launch last week of a range of factor funds from Vanguard.

This isn’t so much because of the concept of one of the leading passive index managers launching itself into the world of ‘active’ funds. Rather, it is because Vanguard on this side of the pond has been running a suite of active funds for over two years.

In terms of factors, the six funds launched last week in the US – the Vanguard US Value Factor ETF, Vanguard US Quality Factor ETF, Vanguard US Momentum ETF and Vanguard US Liquidity ETF plus two multi-factor funds – follow factors that are similar to the European offering.

These are the Global Liquidity Factor UCITS ETF, Global Minimum Volatility UCITS ETF, Global Momentum Factor UCITS ETF and Global Value Factor UCITS ETF.

Tom Bartolacci, head of European capital markets at Vanguard, notes that the funds have been up-and-running for two years in the UK and Europe. He said that like with the new US funds, these active funds have helped extend Vanguard’s mission to lower the cost of investing.

“We are coming up with more tools and papers to help advisers and individuals to understand how to marry index and factor (investing) together,” he told ETF Stream.

“There is still more education to be done for investors, not just to understand what the factor is but also (to look at how to) implement it alongside traditional active or passive strategies because it is within that spectrum.”

Bartolacci was also clear on the terminology that Vanguard would prefer to be used when it comes to describing these funds.

“When we think about indexing, it’s buying the market and the way to buy the market is through a market cap weighted index. Anything that deviates from that is really active,” he said.

“As soon as you move away from that market-weighted index, you are into active territory and there are many different ways to employ that active strategy. It could be rules-based like a smart beta or a factor fund or it could be fundamental active.

“But within an ETF wrapper, it really is up to the product provider to determine what they think they can put in an ETF wrapper that can add value in the long-term.”

The methodology and proprietary modelling that Vanguard deploys behind the factors is based on academic research.

“Within the academic community there is a pretty clear determination of what represents value and what represents quality, for instance, and where those premiums are derived from,” he said.

“I think there is a clear delineation and I think it is up to issuers not to muddy the waters through our product differentiation. We need to tell clients this is what we are putting out here, these are the returns you can expect and the environments this strategy will perform in.”

A fuller interview with Bartolacci will appear on ETF Stream in the coming weeks.

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Hosted by Inside ETFs on 1st October 2018
London, UK