Vanguard Plans To Foray Into Smart-Beta Active ETF World

The world of ETFs has seen a huge transformationover the last few years. Currently worth over $4.0 trillion, the global ETF industry has witnessed exponential growth. The U.S. market is worth over $3.3 trillion, derived from about 2,096 exchange traded products.

The styles and modes of investments are however changing. This is especially true given the fact that issuers need to keep pace with the fast-changing market environment. There is always a pressure to beat the benchmark, navigating tough trading times and peer pressure.

In a nutshell, gone are the days of plain vanilla ETFs or market-cap weighted ETFs. Products with several winning attributes or factor-based, like low volatility or high dividend ETFs, are being launched by issuers. These next generation ETFs are called smart-beta ETFs.

And what could be better if these smart-beta criteria can be incorporated into the active ETFs? These funds are more dynamic. Investopedia goes on to explain that an actively managed ETF will have a benchmark index, but managers may alter sector allocations to maximize returns, market-time trades or shift from the index if they feel like.

The importance of this dynamic approach has long been ignored by one of the largest ETF issuers – Vanguard, if we ignore its dividend and style funds. But not anymore. The issuer recently filed a set of actively managed smart-beta ETFs for the first time in the United States. The asset manager already has such smart beta funds in Canada and the United Kingdom, per an article published on Bloomberg (read: Will Active ETFs Rule Ahead?).

Inside Newly-Filed Funds

Vanguard's recently filed funds include  Vanguard U.S. Minimum Volatility ETF, Vanguard U.S. Value Factor ETF, Vanguard U.S. Momentum Factor ETF, Vanguard U.S. Liquidity Factor ETF, Vanguard U.S. Quality Factor ETF and Vanguard U.S. Multifactor ETF.

The single-factor funds will charge a fee of 13 bps, while the expense ratio of multifactor funds will be 0.18%. Stocks will represent all market cap – large, mid and small.

Factors That Led Vanguard to Walk This Path

One of Vanguard's closest peers – BlackRock – has seen its smart beta assets swell by almost 180% to $288 billion over the past five years, per an article published on Financial Times. Probably, this immense achievement lured Vanguard to join the bandwagon (read: read: Smart Beta Investing: Fad or Future of the ETF Industry?).

Vanguard's own success is no less. "BlackRock and Vanguard are the only asset managers globally with more than $100 billion in smart beta products," per the Financial Times article. So, the issuer is already aware of the appeal of such an investing strategy.

Competition

Vanguard appears to be a late entrant in this field. BlackRock's U.S. Minimum Volatility ETF USMV) is the highest asset grosser in this field, charging 15 bps in fees. iShares Edge MSCI USA Value Factor ETF VLUE, which has an expense ratio of 15 bps, will give competition to Vanguard's value fund (read: BlackRock Slashes Fees, ETF Price War Intensifies).

There is iShares Edge MSCI USA Momentum Factor ETF MTUM (expense ratio 0.15%) in the momentum space. iShares Edge MSCI USA Quality Factor ETF QUAL also charges 15 bps fees. iShares Edge MSCI Multifactor USA ETF LRGF (expense ratio of 0.20%) may also pose threat to the multifactor Vanguard fund.

However, cheaper expense ratios have always been Vanguard's unique selling propositions. Its planned expense ratios are relatively inexpensive when compared to other smart-beta and active ETFs. Therefore, this low fee factor and Vanguard's brand recognition are likely to prove beneficial for the newly-filed funds, if approved.

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ISHRS-MSCI US M (MTUM): ETF Research Reports
 
ISHARS-FS LC&MC (LRGF): ETF Research Reports
 
ISHARS-MS US MV USMV: ETF Research Reports
 
ISHARS-MS US QF (QUAL): ETF Research Reports
 
ISHARS-MS US VF (VLUE): ETF Research Reports
 
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