It may be one of the industry’s favourite buzzwords, but ‘factor’ investing is nothing new
It may be one of the industry’s favourite buzzwords, but, in reality, ‘factor’ investing is nothing new. Dig deep enough and you can find research on factors from as early as the 1930s. However, although the idea of factors is not necessarily fresh, packaging them into an investment vehicle is.
“Factors, in general, are really just ways to explain the risk-return attributes of a particular investment,” says Tim Huver, Head of Product, Americas at Vanguard Investments Canada. “And, what we find is that, when you deconstruct what makes some active strategies successful, factors are often at the core of delivering that outperformance.”
It’s just over a year since Vanguard launched four of its own active factor-based funds, and Huver has been pleased with their performance. The average annual return on all of the ETFs combined is over 14%, and the Global Value Factor ETF (VVL) has a year over year return of 19.79%. The grouping also includes the Global Liquidity Factor ETF (VLQ), the Global Momentum Factor ETF (VMO), and the Global Minimum Volatility ETF (VVO).
“Harvesting those three factors - and also including the global minimum volatility - has been shown to have the potential to provide a persistent outperformance over longer periods of time,” Huver says. “They provide a low cost way for investors to access factors and are a useful alternative to active management.”
The numbers support Huver’s assertion. More investors are utilizing factors as they look for ways to cut costs within their portfolios, and adoption is increasingly steadily. The growth in factor-based products is wide ranging: more providers, assets and cash flow and entering the space on a monthly basis. “With factor-based products, we believe that their ability to provide access to lower cost active strategies is just as attractive as the vehicle itself,” Huver says.
Huver believes the increased adoption can also be attributed to the versatility provided by factor-based funds. “We see that factors can be used to provide a specific tilt to a portfolio, like a value tilt, for example,” Huver says. “Those tilts can be used as effective diversifiers, so if you are overweight growth you can use value to offset that.”
“Increasingly, we are seeing factors being used as a replacement for higher cost active products in the marketplace; we are seeing many investors utilize factors as a substitute product.”
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Active fund managers turning away from ETFs
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“Factors, in general, are really just ways to explain the risk-return attributes of a particular investment,” says Tim Huver, Head of Product, Americas at Vanguard Investments Canada. “And, what we find is that, when you deconstruct what makes some active strategies successful, factors are often at the core of delivering that outperformance.”
It’s just over a year since Vanguard launched four of its own active factor-based funds, and Huver has been pleased with their performance. The average annual return on all of the ETFs combined is over 14%, and the Global Value Factor ETF (VVL) has a year over year return of 19.79%. The grouping also includes the Global Liquidity Factor ETF (VLQ), the Global Momentum Factor ETF (VMO), and the Global Minimum Volatility ETF (VVO).
“Harvesting those three factors - and also including the global minimum volatility - has been shown to have the potential to provide a persistent outperformance over longer periods of time,” Huver says. “They provide a low cost way for investors to access factors and are a useful alternative to active management.”
The numbers support Huver’s assertion. More investors are utilizing factors as they look for ways to cut costs within their portfolios, and adoption is increasingly steadily. The growth in factor-based products is wide ranging: more providers, assets and cash flow and entering the space on a monthly basis. “With factor-based products, we believe that their ability to provide access to lower cost active strategies is just as attractive as the vehicle itself,” Huver says.
Huver believes the increased adoption can also be attributed to the versatility provided by factor-based funds. “We see that factors can be used to provide a specific tilt to a portfolio, like a value tilt, for example,” Huver says. “Those tilts can be used as effective diversifiers, so if you are overweight growth you can use value to offset that.”
“Increasingly, we are seeing factors being used as a replacement for higher cost active products in the marketplace; we are seeing many investors utilize factors as a substitute product.”
Related stories:
Active fund managers turning away from ETFs
The rise and fall of smart beta
