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By Ben Johnson, CFA and Jeremy Glaser | 11-28-2017 02:00 PM

Vanguard Active ETF Launch No Game Changer

Ben Johnson says the new line of active factor-focused funds from Vanguard dovetails with the rest of the firm's lineup, and is unlikely to have a major near-term impact on the firm or the industry.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Vanguard announced the launch of six new ETFs and a new mutual fund that are going to track factors in an active way. Here with Ben Jonson, he's our director of global ETF research, to see what this could mean. 

Ben, thanks for joining me.

Ben Johnson: Thanks for having me, Jeremy.

Glaser: Let's look at this announcement today, these new ETFs that are going to be actively managed, the first active ETFs for Vanguard, looking at factor investors, things like Momentum or low volatility. Was this a surprise announcement to hear from Vanguard to see these launch in the U.S.?

Johnson: This was by no means a surprise announcement. If you go back now nearly two years, Vanguard launched a suite of similar actively managed factor-focused ETFs in London. It subsequently launched a similar suite in Canada. There are a few more regulatory hoops that Vanguard had to jump through before it could do something similar here in the U.S. It's clearly almost in the clear now in terms of salting over those hurdles and it looks like early in the first quarter of next year, we'll see these new funds come to the market.

Glaser: When you look at these funds in relation to the rest of the Vanguard lineup, how do they fit in? How do you think they're expecting investors to use them as they're thinking of launching them in the United States?

Johnson: These new funds have sort of common DNA with Vanguard's existing product lineup. First and foremost, they're very competitively priced. The single factory ETFs are all rolling out with this sticker charge of 13 basis points, 0.13%, which is very competitive, certainly relative to active funds and their respective categories. It's competitive in many cases against direct competitors in the ETF space. Other ETFs that are taking a similar approach to isolating single factors. It's, in some cases, somewhat higher versus existing Vanguard ETFs that take a different approach to tilting toward some of these factors in a way that delivers them in a much more sort of diluted way.

Glaser: When you look at that this is an active ETF, what does that actually mean in this case? Does it mean there's managers kind of picking stocks or is it still more of a quantitatively focused strategy?

Johnson: These ETFs are going to be nominally active. They're going to be just shy of being index funds. They're approach to security selection and portfolio construction will be a largely quantitatively driven. It's not as though Vanguard is going to be hiring teams of analysts and portfolio managers to go out into the field and kick tires and look under hoods to decide how to build the best value factor exposure. This is going to be managed by Vanguard's quantitative equity group. It's a group that has delivered the IP and delivered the process and delivered the performance that's driven a number of their funds. Perhaps most notably, the Vanguard Global Minimum Volatility Fund, which currently sports a Morningstar Analyst Rating of Silver. This is a fund that we've rated for a number of years now, is managed by the same group that will be managing these new factor ETFs. We have a high degree of conviction in the team, their skills and the processes that they employ.

Glaser: Looking ahead, what do you think Vanguard entering the space is going to mean for other industry players, for adoption of these factor strategies? I know it's still the early days, but what kind of impact could there be?

Johnson: I don't necessarily expect a meaningful impact right out of the gate. Remember that these are actively managed funds. What we've seen to date, be it an actively managed funds, be it in sort of new forms of active management, most notably in strategic beta, index tracking funds that like these Vanguard funds look to go out and harness one or more factors to deliver performance that you can guarantee will be different than the performance of a market index, but will have certain cycles will have stretches of out- and underperformance, will ideally harness those factors in a way that delivers value for investors. It's too soon to tell. We've seen demand in more broadly for strategic beta ETFs and traditional index funds diminish somewhat in recent years. We've seen investors tastes shift more toward more vanilla, uber-low cost investment products and ETFs in particular. I don't expect any real material impact either on the nearest competitive set nor the market at large in the early innings from these funds.

Glaser: Ben, thanks for your analysis today.

Johnson: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser, thanks for watching. 

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