Two new series join Vanguard’s growing family of dynamic model portfolios

A new dynamic approach to model methodology

For years Vanguard has published its 10-year forecasts for important economic metrics and asset class returns. Our annual Vanguard Economic and Market Outlook is revisited each quarter and our forecasts are updated as changing conditions dictate.

Earlier in 2024 Vanguard took the important step of creating the first models of a family of portfolios whose allocations are recalibrated throughout the year to align with our current 10-year forecasts. These total-return portfolios seek to outperform a market-capitalization-weighted benchmark. Maintaining a long-term view (10 years) while using a dynamic management approach allows the models to allocate to holdings based on their current and expected fundamentals (for example: yield, valuation)—which may vary meaningfully in different market environments. The first of this family of dynamic models is Vanguard Dynamic ETF Model Portfolio Series.

This time-varying approach contrasts with the methodology of our strategic models. Those models maintain a consistent allocation that reflects a very long-term view, seeking to achieve benchmark returns over a 20-year investment horizon.  

Together, the strategic and dynamic approaches allow advisors to offer broadly diversified, low-cost Vanguard managed solutions to clients with a variety of investment time horizons and risk profiles. 

Our newest dynamic model portfolios

These portfolios will replace Vanguard’s existing Income and Tax-Efficient model portfolios in order to deploy newer methodologies that we believe will better suit a wider variety of investors. Those portfolios will close February 28, 2025 (date may differ by platform).

Vanguard Income Model Series uses Vanguard ETFs and mutual funds that offer exposure to U.S. equities, non-U.S. equities, U.S. fixed income, and non-U.S. fixed income in seeking to produce higher income than the broad market while still optimizing for total return. The active components of the model allow for value-add potential via security selection. The portfolio will trade four times a year to reflect changes in expected investment outcomes.

Vanguard Income Model Series weightings (as of June 30, 2024)

Vanguard Tax-Aware ETF Model Series uses Vanguard ETFs that offer exposure to U.S. equities, non-U.S. equities, U.S. fixed income, and non-U.S. fixed income in seeking to maximize after-tax returns (wealth accumulation for tax-sensitive investors), including two newer fixed income ETFs, Short-Term Tax-Exempt Bond ETF and Intermediate-Term Tax-Exempt Bond ETF. The fixed income portion of the portfolio includes allocations to Treasuries and corporate bonds, in addition to municipal bonds. The portfolio will trade up to four times a year to reflect changes in expected investment outcomes.

Vanguard Tax-Aware ETF Model Series weightings (as of June 30, 2024)

The tools that drive the dynamic methodology

The economic and asset return forecasts that guide the dynamic models 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 can incorporate multidimensional variables such as risk and return of passive market exposures, correlations, and volatilities. 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.

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.

You could lose money by investing in the Federal Money Market Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the Fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress.

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.