The ETF invests in stocks from developed and emerging markets that display a combination of factors that can result in lower portfolio volatility.
Investors committed to an equity allocation in pursuit of their long-term investment objectives can find near-term volatility unsettling. Minimum volatility investing attempts to capture a significant share of stock market performance, while avoiding the sharpest market highs and lows. This allows investors to maintain exposure to equities with the potential for improving risk-adjusted returns.
The ETF invests in stocks from developed markets that display the strongest value factor characteristics.
Historically, a portfolio of stocks with low share prices relative to each company’s fundamental value has outperformed relative to the broad equity market. This return premium can be explained in part by some behavioural biases, such as investors’ tendency to shun companies that may be struggling in the short term, while overpaying for companies that exhibit recent growth.
The ETF invests in stocks from developed markets that display the strongest momentum factor characteristics.
Studies have shown that stocks with strong recent performance have tended to outperform over subsequent short-term periods. This phenomenon, called the momentum factor, may exist because of certain investor behavioural biases, such as the tendency to overreact or underreact to new information and base decisions on recent market activity.
The ETF invests in stocks from developed markets that display the strongest liquidity factor characteristics.
The liquidity factor was identified in research showing that less frequently traded stocks have earned higher returns than stocks that are more frequently traded. One explanation for this phenomenon is that investors perceive less liquid securities as being more risky, and thus expect a return premium for holding them.
ETFs are often associated with index investing, but they can also be actively managed. Vanguard factor ETFs use an active quantitative approach, with each ETF aiming to maintain consistent exposure to a specific factor. The factors we target have historically outperformed the global equity market on either an absolute or risk-adjusted basis.
Factor investing is inherently active because it involves making a decision to tilt a portfolio away from market-cap weightings. Even so, many investments that target factors do so by passively tracking an index. Our portfolio managers aren't tied to an index. They have the flexibility to add or reduce positions as needed to maintain continual, dynamic exposure to the desired factors, even as markets and stocks change through time.
Our factor ETFs have annual management expense ratios (MERs) ranging from 0.40% to 0.42%.2 This compares favourably with the industry average MER of 0.95% for actively managed mutual funds and 0.61% for actively managed ETFs.3
Our ETFs invest globally because the factors we target have been shown to work globally. A global equity portfolio also helps diversify risk while increasing investment capacity and liquidity.
1 Source: Vanguard. Assets in Canadian dollars, as of March 31, 2017.
2 The MERs are the audited MERs as of March 31, 2017, including waivers and absorptions, and are expressed as an annualized percentage of the daily average net asset value. The MERs would have been 0.42% without any absorptions or waivers. Vanguard Investments Canada Inc. expects to continue absorbing or waiving certain fees indefinitely but may, in its discretion, discontinue this practice at any time.
3 The MERs provided are asset-weighted averages, as of December 31, 2016. The average MER for industry mutual funds was provided by Strategic Insight and includes Series F mutual funds only and excludes ETFs, funds with performance fees, money market funds, funds with management fees charged at account level, hedge funds, index funds and LSVCC funds. The average MER for industry ETFs was provided by Bloomberg and Vanguard and excludes funds with performance fees, funds with management fees charged at account level and index funds.