Turn Vanguard forecasts into asset allocation guidance

The ability to adapt and adjust to changing market conditions can be an effective way to seek outperformance. The degree of adjustment is important, though. Traditional static, or strategic, portfolios use allocations that are adjusted only to remain in sync with the exposures of the broad indexes they follow. These are valuable for your clients seeking benchmark returns over long periods with minimal volatility. Investors who can stomach more risk, on the other hand, may prefer portfolios that attempt to capture big gains over shorter time periods.

There’s a third way—more dynamic than an index-based portfolio, but with a longer time frame and more emphasis on risk management than a tactical portfolio. This is the domain of the Vanguard Dynamic ETF Model Portfolio Series, which reallocates its holdings each quarter to reflect changes in Vanguard’s prevailing 10-year economic and market outlook.  

Three possible portfolio approaches

Benefits of the Vanguard Dynamic ETF Model Portfolio Series

1. Maintains a long-term perspective. By using our 10-year projections, the model avoids shorter time horizons that can be driven by prevailing valuations, adding risk. At about the 10-year mark, unusually high or low valuations tend to revert to mean fair value.
2. Uses a disciplined, repeatable process. Portfolios are constructed using our proprietary forecasting models, Vanguard Capital Markets Model (VCMM) and Vanguard Asset Allocation Model (VAAM). These models help us account for changing economic drivers, valuation, risk, and other attributes that can impact returns and volatility.
3. Uses allocation constraints for risk management. Stock/bond reallocations within the model are limited to 5% shifts each quarter, to help manage overall portfolio risk and variability of returns.

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

Derive optimal allocations
This series utilizes our innovative models, VCMM and VAAM, to derive optimal asset allocations based on current market conditions and long-term projections. VCMM is a proprietary financial simulation tool developed by Vanguard's investment research and advice teams. It projects forward-looking asset return distributions for a range of global asset classes and risk factors, considering factors such as market valuations, interest rates, and inflation.

One of the important ways this portfolio manages volatility is by avoiding point-based forecasts: VCMM’s projections are probability distributions. By suggesting a range of potential conditions rather than attempting to predict precise outcomes, the model avoids the pitfalls of market timing. Asset managers that employ such a tactical approach claim to have superior information, allowing them to outperform everyone else. We don’t make such a claim. We use VCMM to assess public information such as market valuations or market regimes such as low-yield environments, periods of rising rates, or persistently high inflation.

The outputs of VCMM are a key input to our asset allocation model, VAAM, which simulates all possible portfolios to identify the allocations with the greatest probability of meeting the models’ objectives, given the different risk-return tradeoffs inherent in portfolio construction. 

Take advantage of low costs and diversification
The Vanguard Dynamic ETF Model Series is designed to be a low-cost solution for your clients. It utilizes highly liquid and low-cost exchange-traded funds (ETFs) to implement its asset allocation strategy. Additionally, the model offers broad diversification across asset classes, geographies, and investment styles, reducing concentration risk and enhancing portfolio stability.

Who might benefit?
The Vanguard Dynamic ETF Model Series is intended to complement Vanguard's existing index-based asset allocation models. It provides an additional option for investors who prefer a dynamic asset allocation approach and are comfortable with some additional risk in return for a portfolio that seeks to outperform static market benchmarks. It also can be an ideal solution for smaller portfolios.

Availability of the model
If you wish to use the Vanguard Dynamic ETF Model Portfolio Series, simply subscribe to the model series to receive quarterly allocation updates each quarter, as well as commentary, fact sheets, and monthly performance data.

Notes:

For more information on Vanguard ETFs, visit advisors.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 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 the possible loss of the money you invest. 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.