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The belief currently has taken hold among many investors that since index funds frequently come out ahead of actively managed funds, which is mainly where investors should be placing their money. As a result, investors are moving more and more of their money to passively managed ETFs (and mutual funds) as compared to actively managed ones. In fact, assets in passive investments now top those in active funds for the first time. See this article for details.
While investments in the S&P 500 and the total stock market, such as SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), Vanguard Total Stock Market Index Fund ETF (VTI), and Vanguard S&P 500 ETF (VOO) are the ETF investment giants in the room, investors seeking additional diversification, potential outperformance, or reduced risk often turn to stock investments in other areas. Such investors usually have strong hunches that the above unmanaged investments could be overvalued or could be outperformed by various other market categories under the guidance of knowledgeable fund managers.
Such alternate categories might include funds with a quality focus, or those that have a history of profiting from momentum. In fact, researchers have identified at least four favorable characteristics of stocks to assemble into fund portfolios: value, momentum, quality, and minimum volatility.
Vanguard currently has a line-up of five such so-called “factor” funds. Should you invest in such funds? Well, based on performance over the last five years, one should certainly give these ETFs a look.
The best way to show why is by comparing the returns for each of these funds with the returns of their passive Vanguard ETF index funds of the same category. Morningstar.com classifies all funds in terms of each’s portfolio composition. We want to see which of each of the factor funds, shown below in bold, has returns better than just investing in the similar Vanguard ETF choices. Here are the results through 2/14/24:
| Fund/Category | 3 mo. Return | 1-Year Return | 3-Year Return | 5-Year Return |
|---|---|---|---|---|
| Vanguard U.S. Momentum Factor ETF (VFMO) | 21.42 | 21.26 | 3.62 | 14.29 |
| Vanguard Mid-Cap Growth ETF (VOT) | 12.86 | 12.80 | -0.27 | 11.04 |
Note 1: All multi-year returns in this article are annualized.
Note: 2: All returns, also shown in bold type, did better than a similar unmanaged Vanguard fund of the same category over that period.
| Fund/Category | 3 mo. Return | 1-Year Return | 3-Year Return | 5-Year Return |
|---|---|---|---|---|
| Vanguard U.S. Quality Factor ETF (VFQY) | 12.10 | 15.33 | 7.06 | 11.89 |
| Vanguard Mid-Cap Index Fund ETF (VO) | 10.49 | 7.12 | 3.07 | 10.05 |
| Fund/Category | 3 mo. Return | 1-Year Return | 3-Year Return | 5-Year Return |
|---|---|---|---|---|
| Vanguard U.S. Multifactor ETF (VFMF) | 12.08 | 13.85 | 10.38 | 11.49 |
| Vanguard Mid-Cap Index Fund ETF (VO) | 10.49 | 7.12 | 3.07 | 10.05 |
| Fund/Category | 3 mo. Return | 1-Year Return | 3-Year Return | 5-Year Return |
|---|---|---|---|---|
| Vanguard U.S. Minimum Volatility ETF (VFMV) | 7.31 | 9.35 | 6.44 | 7.93 |
| Vanguard Mid-Cap Index Fund ETF (VO) | 10.49 | 7.12 | 3.07 | 10.05 |
| Fund/Category | 3 mo. Return | 1-Year Return | 3-Year Return | 5-Year Return |
|---|---|---|---|---|
| Vanguard U.S. Value Factor ETF (VFVA) |
9.78 |
4.63 | 10.69 | 10.95 |
| Vanguard Mid-Cap Value Index Fund ETF (VOE) | 8.32 | 2.04 | 6.39 | 8.64 |
As you can see, each factor fund, except VFMV, outperformed its more widely known ETF counterpart, regardless of the time period considered, but especially over the last one and three years. Altogether, five years may be a sufficiently long time period that one may have considerable confidence that the consistent outperformance was not merely a fluke.
Yet Vanguard factor funds have attracted only a small amount of investor assets. Does this suggest that Vanguard may shut these funds down just like they shut down an earlier factor fund, Vanguard U.S. Liquidity Factor ETF (VFLQ) in spite of decent performance? Apparently, investors have not yet discovered these funds.
Perhaps readers of this article should check them out and strongly consider investing in them, especially if the bulk or all of your investments are in the four investment giant funds mentioned at the start of this article.
Other investment companies also have factor funds. For example, Fidelity Investments has Fidelity Low Volatility Factor ETF (FDLO) Fidelity Momentum Factor ETF (FDMO) Fidelity Quality Factor ETF (FQAL) Fidelity Small-Mid Multifactor ETF (FSMD), Fidelity U.S. Multifactor ETF (FLRG), and Fidelity Value Factor ETF (FVAL). In general, these Fidelity funds have not been as successful as the Vanguard factor funds.
