Factor investing is an investment approach that involves targeting quantifiable firm characteristics or “factors” that can explain differences in Stock returns. A factor-based investment strategy involves tilting equity portfolios towards and away from specific factors in an attempt to generate long-term investment returns in excess of benchmarks. The approach is quantitative and based on observable data, such as stock prices and financial information, rather than on opinion or speculation.

Source: Wikipedia

Vanguard has introduced 6 factor-based ETFs.

Factor ETFs are not index Funds i.e. passively managed. They are actively managed. In a traditional index based ETF the weightage is based on market capitalization. In factor based ETFs the weightage is based on contribution that the stock makes to the underlying factor. So, a higher market capitalization need not always lead to a higher weightage in the ETF. The selection of stocks is based on rules for e.g. low P/E ratio and is not based on any qualitative assessment of each stock. Additionally the rules are not set in stone either and could be changed.

The expense ratio (ER) of factor funds is definitely higher compared to other ETF offerings from Vanguard. That being said it is still lower than comparable ETFs from competitors. Factor ETFs from iShares (BlackRock) have an expense ratio of around 0.15%. Since Vanguard is a late entrant to factor based investing this might be there way to entice new customers. Interestingly the ETFs offered by iShares are index based.

The holdings will be monitored on a daily basis. I think these ETFs might have significant turn over and would be well suited for tax-advantaged space.

Vanguard U.S. Value Factor ETF (VFVA), ER 0.13% & P/E 11.4
This fund predominantly invests in stocks with low valuations. This portfolio provides broad diversification across all sectors and capitalization. Micron Technology (MU) is the largest holding at 0.85% of funds. 28.1% of the funds are invested in the Financial Services sector. Large-cap stocks make up 36.1% of the portfolio. This fund has 783 positions as of 03/31/2018 and an YTD ROI of 1.25%.

Vanguard U.S. Quality Factor ETF (VFQY), ER: 0.13% & P/E 22.6
This fund predominantly invests in stocks with strong Return on Equity (ROE), Earnings growth, debt-to-equity and profitability. This portfolio provides broad diversification across all sectors and capitalizations. Walmart (WMT) is the largest holding at 0.99% of funds. 24.2% of the funds are invested in consumer discretionary sector. Large-cap stocks make up 35% of the portfolio. This fund has 690 positions as of 03/31/2018 and an YTD ROI of 1.95%.

Vanguard U.S. Momentum Factor ETF (VFMO), ER 0.13% & 24.1
This fund predominantly invests in stocks with strong recent performance (high momentum characteristics). This portfolio provides broad diversification across all sectors and capitalizations. Boeing (BA) is the largest holding at 0.84% of funds. 19.7% of the funds are invested in Healthcare sector. Large-cap stocks make up 33.4% of the portfolio. This fund has 715 positions as of 03/31/2018 and an YTD ROI of 2.01%.

Vanguard U.S. Liquidity Factor ETF (VFLQ), ER 0.13% & P/E 20.0
This fund predominantly invests in stocks with low trading liquidity. This portfolio provides broad diversification across all sectors and capitalization. Ecolab (ECL) is the largest holding at 0.82% of funds. 35.2% of the funds are invested in Financial Services sector. Large-cap stocks make up 36.5% of the portfolio. This fund has 903 positions as of 03/31/2018 and an YTD ROI of 2.19%.

Vanguard Minimum Volatility ETF (VFMV), ER 0.13% & P/E 21.8
This fund predominantly invests in stocks with low volatility. This portfolio provides broad diversification across all sectors and capitalization. Progressive (PGR) is the largest holding at 1.65% of funds. 25.4% of the funds are invested in Financial Services sector. Large-cap stocks make up 35.6% of the portfolio. This fund has 144 positions as of 03/31/2018 and an YTD ROI of 3.48%.

Vanguard U.S. Multifactor ETF (VFMF), ER 0.18% & P/E 18.2
This fund predominantly invests in stocks with three characteristic i.e. momentum (strong recent performance), value and quality. This portfolio provides broad diversification across all sectors and capitalizations. HP Inc. (HPQ) is the largest holding at 1.19% of funds. 28.1% of the funds are invested in Financial Services sector. Large-cap stocks make up 33.7% of the portfolio. This fund has 596 positions as of 03/31/2018 and an YTD ROI of 1.99%.

All together there are 9 sectors in which these factor funds invest. Financial sector scores the highest across all factors. It is followed by Consumer discretionary and Technology. Something I would keep in mind while investing. I ignore momentum factor as it is not a fundamental measure.

My purpose in writing this article was twofold. Firstly as an introductory article for the new Vanguard factor-based funds. Secondly these funds are very useful in screening stocks based on particular factors. Even if I don’t end up owning any of these ETFs my hope is that I could use them as a stock screening tool i.e. to pick specific category of stock. For e.g. if I am interested in a high momentum stock I could consider Boeing (BA).