Factor investing has a seductive pitch: own the “right” kind of stocks—cheap, profitable, steady—and beat the market.
There’s just one problem. In the real world, it mostly hasn’t worked.
Vanguard’s factor ETFs are a case in point. Since launching in 2018, only one has beaten the broad market, and just barely, at that. The rest? They’ve lagged, and by more than a little.
I say this, and yet, if you look at the IVA Portfolios, you'll find a factor fund (of sorts) sitting right at the core. I’ll get to that in a minute.
That’s not a contradiction—it’s a distinction. Not all factor funds are created equal, and how you use them matters as much as the ones you pick and the ones you avoid.
Here’s what the evidence actually shows—and what to do about it.
Factor Funds Aren’t New
Call it smart beta, factor investing, or enhanced indexing, the idea is simple: tilt your portfolio toward stocks with certain characteristics and you’ll outperform over time.
Those factors might include low valuations, strong profitability, stable prices or positive momentum.
The academic case is well established. Over long periods, these “factors” have delivered excess returns.
Vanguard has been in the factor game for decades—even if they didn't always call it that.
SmallCap Index (VSMAX), Value Index (VIVAX) and Growth Index (VIGAX) are all factor funds. So are its dividend-oriented index funds, Dividend Appreciation Index (VDADX) and High Dividend Yield Index (VHYAX).
But in 2018, Vanguard officially threw its hat in the ring with a dedicated lineup of six factor-labeled ETFs:
- U.S. Value Factor ETF (VFVA): Stocks with low valuations relative to their fundamentals
- U.S. Momentum Factor ETF (VFMO): Stocks that have performed well recently
- U.S. Quality Factor ETF (VFQY): Stocks with strong balance sheets and profitability
- U.S. Minimum Volatility Factor ETF (VFMV): Stocks with historically steadier prices
- U.S. Multifactor ETF (VFMF): Blends the momentum, quality and value factors into a single portfolio—though it isn't simply a combination of the three individual funds
- U.S. Liquidity Factor ETF (shuttered in 2022): Stocks that trade less frequently
With eight years under their belt, we can ask whether the real-world returns for Vanguard’s remaining factor ETFs have lived up to the backtests.
Eight Years In
The verdict on Vanguard's factor ETFs is not kind.