Vanguard Investments Canada has announced it will launch four new actively managed ETFs. This is a first for Vanguard Canada, as all its current products are passive index ETFs.
Active, but not traditionally active
The traditional approach to active management involves selecting stocks based on the manager’s appraisal of the companies’ stock valuation, growth prospects and management strength. Vanguard’s four new ETFs will adopt a comparatively more modern approach, investing in global stock portfolios that bear certain characteristics (or “factors”), which have been documented to provide higher expected returns in the long run:
- Liquidity factor: stocks that are less liquid than the average;
- Minimum volatility: stocks that are less volatile than the average;
- Momentum: stocks that have recently outperformed the market in general;
- Value: stocks that are low-priced relative to basic metrics such as earnings per share, book value and dividend.
Where “active” doesn’t mean “expensive”
High fees are a frequent flaw of actively managed funds. This will not be the case for the new Vanguard ETFs, which are expected to charge investors a 0.35% management fee. All in all, after accounting for GST and HST, the Vanguard ETFs can be expected to cost close to 0.40%, a very competitive offering for an active fund. However, this still works out to roughly twice the cost of a straight global index fund.
Factor investing and PWL
Factor investing has been part of PWL’s investment philosophy since 2000. For a long time now, we have been managing broad-based global portfolios with “tilts” (overweighted positions relative to the general market) toward value and small-cap securities, and more recently, in the stocks of profitable firms that research identifies as offering higher expected returns.
A look ahead
Like all new investment products, we will review the new factor ETFs using a cost-benefit analysis. On the plus side, this analysis will weigh the added diversification and increase in expected return offered by each strategy. On the minus side, some of these strategies are likely to carry a high tax cost—especially momentum ETFs, which tend to generate a high turnover, resulting in potentially high capital gain taxes. Another minus of factor ETFs is a decrease in investor focus: Beyond a certain point, a portfolio with too many factors becomes a distraction. This issue is comparable to a car with too many gadgets that distract the driver’s attention away from the road. Investors should primarily be directing their attention toward achieving their financial goals rather than to elaborate portfolio strategies.
In any event, don’t expect our decision too soon: PWL always take the time required to properly evaluate new investment products—especially sophisticated ones. We prefer to see how they fare over time.