Introducing the Vanguard Dynamic Active-Passive Model

Introducing a new dynamic model

Building on the success of our strategic Active-Passive Model series, Vanguard is now introducing a dynamic version of the model. The new Dynamic Active-Passive (DAP) Model Portfolio’s allocations are adjusted throughout the year to align with Vanguard’s current 10-year market forecast.

Maintaining a long-term investing perspective and employing a dynamic management approach allows the DAP model to combine low-cost index building blocks with active strategies and reflect when active management is most likely to add value for investors.

Designed for wealth accumulation, the DAP model provides diversified exposure to global equity and fixed income markets by blending actively and passively managed Vanguard funds and ETFs in a dynamic asset allocation framework that trades four times a year.

​This dynamic active-passive approach is available in five different risk sleeves—conservative, moderately conservative, moderate, moderately aggressive, aggressive—for clients with differing comfort levels of risk. Plus, the model also includes 100% fixed income and 100% equities sleeves, which can be used as stand-alone products or to complement other portfolio holdings.

The Vanguard Dynamic Active-Passive Model is intended for investors with the goal of intermediate- to long-term wealth accumulation. It is an additional option for those seeking to outperform a passive benchmark through active management with a dynamic asset allocation framework. It can be an ideal total portfolio solution or supplement core portfolio holdings.

This model portfolio is currently available as portfolio construction guidance, published by Vanguard each quarter with any adjusted allocations. Advisors can subscribe here.

The tools that drive DAP

The economic and asset return forecasts that guide the DAP model portfolios are the product of Vanguard’s Capital Markets Model (VCMM) 10-year forecasts for income and price returns, as well as the Vanguard Asset Allocation Model (VAAM) portfolio optimization.

VCMM is a proprietary financial simulation tool that forecasts distributions of future returns for a wide array of global asset classes and is the basis for our capital market expectations.

Using a long span of historical monthly data, the VCMM estimates a dynamic statistical relationship among global risk factors and asset returns. Based on these calculations, the model uses regression-based Monte Carlo simulation methods to project relationships in the future. By explicitly accounting for important initial market conditions when generating its return distributions, the VCMM framework departs fundamentally from more basic, but widely used, Monte Carlo simulation techniques. VCMM also recognizes the inherent uncertainty in future market returns by presenting its forecasts as a probabilistic distribution, rather than single-point estimates.

VAAM, the Vanguard Asset Allocation Model, evaluates the risk and return trade-offs of selected asset classes to reach optimal solutions relative to a level of risk aversion (i.e., risk tolerance) based on VCMM asset return projections. The model simultaneously optimizes across three dimensions of risk and return: manager alpha and active risk, passive market exposures, and factor exposures. The VAAM optimization process evaluates thousands of unique portfolio combinations and proposes the portfolio with the highest expected utility score based on the portfolio’s distribution of terminal wealth.

The VAAM approach explicitly incorporates three types of inputs: portfolio objectives and constraints, our long-term asset outlook, and our forward-looking (10+ year) risk and return expectations for the underlying funds.

See if DAP is right for your clients

Check out the new DAP model today. It’s low cost, straightforward, true to label, and designed for clients who seek wealth accumulation. Subscribe today!

This model portfolio is currently available as portfolio construction guidance, published by Vanguard each quarter with any adjusted allocations. Advisors can subscribe here.

Notes:

For more information about Vanguard funds, visitadvisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All investing is subject to risk, including possible loss of principal. Investments in bonds are subject to interest rate, credit, and inflation risk.

Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Vanguard does not, and will not, make any representations about whether a model portfolio is in the best interest of any investor, is not, and will not be, responsible for the determination of whether a model portfolio is in the best interests of any investor, and is not acting as an investment advisor to any investor. It is the investment advisor's responsibility to determine the appropriateness of the model portfolios, or any of the securities included therein, for any client.

The Vanguard model portfolios are provided for illustrative and educational purposes only. The Vanguard model portfolios do not constitute research, are not personalized investment advice or an investment recommendation from Vanguard to any client of a third party financial professional and are intended for use only by a third party financial professional, with other information, as a resource to help build a portfolio or as an input in the development of investment advice for its own clients. Such financial professionals are responsible for making their own independent judgment as to how to use the Vanguard model portfolios.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.