Since its launch in 2018, indexing giant's liquidity ETF has failed to gain critical mass
Indexing behemoth Vanguard has just revealed that it plans to liquidate a US exchange traded fund, its first black mark in a 20-year record of operating in the ETF business.
In a press release, the firm said the US$44-million Vanguard US Liquidity Factor ETF will be liquidated in November. The fund, the smallest in a family of factor-tilting products that includes six funds, has not gained traction since it debuted in 2018. According to the manager, the remaining funds have total assets of US$3.4 billion.
In the statement, Dan Reyes, head of Vanguard's portfolio review division, said, "We continue to add new products that have investment merit and meet investors' preferences, change advisers and mandates to improve investor outcomes, and eliminate funds that lack a distinct role in investors' portfolios."
Read more: The follies of factor fund investing
Despite the setback, the company still maintains its support for factor investing. But the firm's dedication to a line of products that haven't exactly been the runaway successes has at least one analyst in doubt.
“Poor performance, low usage (assets) and the manager departure are not unique to Liquidity Factor ETF, which would argue for this being a sign of things to come,” Adviser Investments' chief of research, Jeffrey DeMaso, told the Financial Times.
Drawing on information from the Adviser Investments database, DeMaso pointed to another fund in the suite, the US Minimum Volatility ETF, which had only US$69mn in assets as of the end of August. He also noted that Antonio Picca, the founding portfolio manager for the factor suite, left Vanguard in July.
Recently, other asset managers have also rationalized their smart beta and factor lines. Earlier this year, Nationwide discontinued its three smart beta ETFs. Franklin Templeton, WisdomTree, Principal, and Alpha Architect have all made substantial changes to their own factor-investing families.
Vanguard has a complicated history with factor investing. The company resented the notion of factor-tilts replacing conventional market-cap-weighted indices a decade ago, in the early days of smart beta. But since factor techniques were ideally suited for the transparent ETF wrapper at the time of introduction, Vanguard introduced them as the company's first active equity ETFs.
Read more: Billions pour into semitransparent ETFs
According to Bryan Armour, head of passive strategies for Morningstar's North American region, the rollouts may have been too unusual and too late to compete in the quickly expanding market.
In the three years ending in August, the US Liquidity Factor fund from Vanguard returned 7.1%, falling 4.8 percentage points short of its declared benchmark, the Russell 3000 Index. The fund's 16.9% year-to-date declines are comparable to those of the index.
In total, US$100.3 billion was invested in strategic beta ETFs in Morningstar's database during the first eight months of the year.
