What You Don’t Know About These Vanguard and Fidelity ETFs That May Be Hurting Your Alpha

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In October 2022I brought to investors’ attention the six actively managed equity ETFs that were part of Vanguard’s extensive lineup of passively managed ETFs. These ETFs are what are called factor or smart beta investments. (For a definition of factor ETFs, see this link.) article.)

At that time, five of the six were performing exceptionally well, ahead of their corresponding investment category, with the sixth statistically tied.

Since then, one of the original six ETFs has been closed, not because of poor performance, but because of a lack of assets accumulated since the fund’s inception. In contrast, three new actively managed bond ETFs have been added.

Earlier this year, Feb.I drew investors’ attention to the fact that these five remaining ETFs were still outperforming their peer, but unmanaged, ETFs in almost every case, and often significantly, over any time period (up to five years). I urged investors to consider these investments carefully.

Surprisingly, according to LipperFactor-based ETFs now account for a global market share of just over 20% of all ETF products as of May and “have become mainstream investments.” He adds:

“It is no surprise that investors around the world are using factor-based ETFs in their portfolios, as these products provide access to a broad range of factors that have proven they can be leveraged to deliver additional returns to investors over longer periods of time.”

Another surprising fact: factor-based investments saw their assets under management increase by $193 billion in 2014 According to Lipper data, fixed-income funds totaled $2.5175 trillion as of May, so it’s understandable why many investors are now including one or more factor funds in their portfolio.

In my February article cited above, you can see how well the five Vanguard factor equity funds performed relative to their peer indices, and they continue to do so, as you’ll see below.

Since the February YTD data above was based on only 1 1/2 months, let’s now look at the six-month data, ending June 30.

Let’s also look at how five similar factor stock ETFs offered by Fidelity performed.

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Note: Returns for funds that beat their indices over the periods shown are shown in bold type. Returns for five-year periods are annualized.

Discussion

Unfortunately, none of the Vanguard and Fidelity similar fund pairs are directly comparable. Why? Because each member of the pair focused on a different fund category. So what conclusions can we draw from this?

The Vanguard US Momentum Factor ETF outperformed its semiannual peer fund index by 9.22%. And over five years, it has outperformed its index by nearly 4%. However, its management has chosen to focus on mid-cap growth rather than large-cap growth. As a result, the Fidelity Momentum Factor ETF may have been a better pick in the short term, but not in the long term.

The same problem affected the Vanguard US Quality Factor ETF versus the Fidelity Quality Factor ETF, although the latter did not beat its indices for either period measured.

The Vanguard US Multifactor ETF and Fidelity Small-Mid Multifactor ETF portfolios were comprised of completely different stock classes, so no comparative conclusions can be drawn, although clearly the former was a better choice between the two.

In the case of the Vanguard US Minimum Volatility ETF versus the Fidelity Low Volatility Factor ETF, the former would have been a slightly better choice than the latter, but the long-term converse favors the latter.

Finally, for the last comparison, the Fidelity fund would have been a better choice for short or long term results than the Vanguard fund.

Conclusion

When it comes to investing in any of these funds, the majority of them have shown better returns (alpha) than simply investing in their peer fund indices. I think this is strong evidence that factor ETFs are certainly worth considering for any investor’s portfolio. Vanguard’s equity factor ETFs appear particularly attractive to long-term investors, with generally strong outperformance over five years.

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