When Vanguard acts, the financial markets take notice. So when the $5 trillion asset management giant launched six U.S.-listed active exchange-traded funds in February, one had to wonder if the tiny universe of actively managed ETFs would feel the Vanguard effect.
Five of those funds target a single factor, respectively, and all come with a sticker price of 13 basis points. The sixth fund, a multifactor product, has an expense ratio of 18 basis points. At the time the funds were introduced, active ETFs were a tiny slice of the ETF universe with $44.7 billion in total assets under management, or just 1.3% of the overall U.S. ETF market, according to FactSet.
Yet active ETFs were the fastest growing ETF segment in 2017 by percentage of AUM, gaining $15.5 billion. Nonetheless, very little of that growth has been in equity products. Perhaps the relative obscurity of active equity ETFs explains why investors have been slow to gravitate toward Vanguard’s nascent ETF lineup—these six funds attracted only about $136 million in assets as of June 29. The Vanguard U.S. Multifactor ETF (VFMF), the largest in the group, had attracted $49.4 million in assets.
However, the new lineup—which also includes the Vanguard U.S. Minimum Volatility ETF (VFMV), the Vanguard U.S. Value Factor ETF (VFVA), the Vanguard U.S. Momentum Factor ETF (VFMO), the Vanguard U.S. Liquidity Factor ETF (VFLQ) and the Vanguard U.S. Quality Factor ETF (VFQY)—may yet change the face of active ETF investing with their rules-constrained, ultra-low-cost management.
“These funds are rules based, but we are not tied to an index and have the ability to move the portfolios a little bit every day to maintain a consistent factor exposure,” says Antonio Picca, head of factor-based strategies and senior portfolio manager at Vanguard. “That’s where our funds are really active.”
Indeed, Vanguard’s filing documents say the funds do not rebalance or reconstitute on any set schedule, and that managers may make small changes to the ETFs on a daily basis to make sure they’re effectively targeting their intended factors.
Vanguard’s suite of active, factor-based ETFs are managed by its Quantitative Equity Group, which oversees roughly $38 billion in the firm’s global lineup of quant ETFs and mutual funds.
But Janet Flanders Johnston, portfolio manager at TrimTabs Asset Management, argues that rules-based ETFs like Vanguard’s are not really active enough to offer investors differentiated performance.
“Some of these new ETFs labeling themselves as active aren’t truly active,” Johnston says. “For example, a group of ETFs just introduced are only active to make sure their stocks are tracking their identified factor—that doesn’t sound very discretionary to me.”
Johnston manages the TrimTabs All Cap US Free Cash Flow ETF (TTAC), which focuses on U.S. companies with high levels of free cash flow and declining share counts. Johnston and her co-managers have full discretion over the fund’s portfolio.