The widespread notion that passive investments outperform actively managed funds has significantly shifted the investment landscape. This trend has led to a surge in the movement of assets from actively managed funds to passively managed ETFs, notably the giants in the room like 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).
However, many investors seeking diversification, potential outperformance, or reduced risk often venture beyond the above-mentioned unmanaged investments. They seek market categories under the guidance of skilled fund managers, with strong beliefs that these investments may be overvalued or outperformed by other market categories. Notably, funds with a quality focus or a history of profiting from momentum are being sought after.
Vanguard is currently offering five “factor” funds that tap into these categories, focusing on value, momentum, quality, and minimum volatility.
Let’s delve into their performance over the past five years, comparing them with passive Vanguard ETF index funds of the same category to see if they are truly worth the investment.
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 U.S. Quality Factor ETF (VFQY) | 12.10 | 15.33 | 7.06 | 11.89 |
| Vanguard U.S. Multifactor ETF (VFMF) | 12.08 | 13.85 | 10.38 | 11.49 |
| Vanguard U.S. Minimum Volatility ETF (VFMV) | 7.31 | 9.35 | 6.44 | 7.93 |
| Vanguard U.S. Value Factor ETF (VFVA) | 9.78 | 4.63 | 10.69 | 10.95 |
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.
It’s evident that each factor fund, except VFMV, outperformed its more widely known ETF counterpart, especially over the last one and three years. This consistent outperformance over a five-year period warrants investor confidence.
Surprisingly, despite their superb performance, Vanguard factor funds have garnered only a small share of investor assets. This raises the question of whether Vanguard may one day shut these funds down, like they did with an earlier factor fund, Vanguard U.S. Liquidity Factor ETF (VFLQ), despite its decent performance. It seems that investors have yet to discover these funds.
For readers looking to diversify their investments beyond the major fund choices, exploring these factor funds and considering investing in them would be wise. In fact, if the bulk or all of your investments are already in the aforementioned four investment giant funds, adding these factor funds may be a prudent move.
Other investment companies also offer factor funds, but Vanguard’s have clearly outperformed these options. For instance, Fidelity Investments’ factor funds have not achieved the same level of success as Vanguard’s.
