FACTOR-BASED STRATEGIES

Our difference

Learn how our actively managed, rules-based approach represents an innovative way to target factors.

Overview

Vanguard's factor products are managed by our in-house Quantitative Equity Group (QEG). QEG has deep expertise in applying rules-based investing that is backed by more than 25 years of experience.


QEG is staffed with a deep bench of credentialed professionals. Among its 30 strategists, analysts, and portfolio managers. 13 hold the CFA designation and seven have a Ph.D. The team's smaller size promotes close collaboration among team members. QEG benefits from Vanguard's scale to leverage best practices, low-cost execution, and the expertise of traders in multiple markets around the globe.


There is no reliance on a star manager or key individual. Because no one person is responsible for all portfolio management decisions, you can be assured of continuity in our investment approach.

Our strengths

Mitigating drift

QEG portfolio managers continually monitor our factor products to help ensure the targeted exposure does not drift through time. Unlike many competitors' products, our factor exposures are assessed daily and rebalanced as needed to lessen factor decay.

Diversifying exposure

Market-cap weighting has its advantages, and many factor products on the market are built that way. But we believe equity factor-based strategies should prioritize the degree of exposure above all else. Our portfolios are designed to provide a high level of diversification while reducing exposure to individual-security risk and intensifying exposure to the targeted factor. This control can help you further customize the tilt-to-factor exposures that can help clients meet their long-term goals.

Leveraging experience

Vanguard's experience in managing factor funds outside the United States helps us deliver factor-based strategies that resonate with investors' needs.

How we build our factor-based products

More than 300 factors have been documented in the academic literature. Framing them with these three guidelines, we have selected four of the most well-known factors for our products to target: Value, momentum, quality, and minimum volatility.

More than 300 documented characteristics, 4 Vanguard factors

At Vanguard, a factor must meet three criteria to be considered viable for targeting:

Enduring, logical rationale

A factor must display an enduring, logical rationale for investing, either through risk- or behavioral-based reasons.

Empirical evidence

A factor's chances of helping an investor meet an objective must be backed by solid empirical evidence, such as out-of-sample tests or academic studies.

Investability

A factor must be investable. The reward must be worth the risk once real-world implementation costs enter the equation (expense ratio, bid-ask spreads, and taxes).
Graphic showing the various factors and differentiators of single factor products

Methodology

The methodology we employ to build our factor portfolios helps us to achieve a broader and stronger factor exposure that is more diversified across individual stocks, giving us greater flexibility to maintain consistent exposure over time.

We believe that factor-based strategies should prioritize broader diversification and stronger factor exposure above all else.

Take a deep dive into our factor methodology and learn how we deliver focused exposure in a low-cost, flexible, and transparent way. View our Step-by-Step guide to factor construction brief.

Assess the opportunities

Our quantitative process analyzes thousands of stocks each day.

Calculate the factor score

Each stock is evaluated on commonly recognized metrics per single factor fund.

Create the portfolio

High-scoring stocks are included in the portfolio and weighted according to their score.
 
  • Employ quantitative models to minimize volatility while limiting exposure to common risk factors.
  • Assess the volatility of individual stocks in addition to examining the correlation of returns among stocks.
  • Put risk controls in place around sectors, individual stock weights, and other considerations to help ensure diversification and liquidity.
A multicolored circle that represents the equities market is shown in three phases. The first phase is a full circle. The second phase removes the market's most volatile stocks, resulting in a partially filled circle. The third phase arranges the remaining three factor exposures by factor score, and their overlap is highlighted to represent a multifactor product's target exposure.

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Building our multifactor products

 

A multicolored circle that represents the equities market is shown in three phases. The first phase is a full circle. The second phase removes the market's most volatile stocks, resulting in a partially filled circle. The third phase arranges the remaining three factor exposures by factor score, and their overlap is highlighted to represent a multifactor product's target exposure.

Methodology

When it comes to our multifactor offerings, we employ a bottom-up construction. This means that the portfolio is based on a selection of equities that provide positive exposure to the desired factors, combined into a single product.

A volatility filter is used to first screen out the most volatile stocks from the initial universe. The remaining stocks are assigned a composite factor score based on equally weighting their value, momentum, and quality scores.

 

This technique may lead to lower turnover and can help ensure that chosen stocks are not inadvertently tilted against the targeted factors.

Bottom-up multifactor products
  • Outsource factor decisions.
  • Capture interaction effects between factors.
  • Provide ease of implementation.

Learn more about factor-based strategies

Got questions about factor-based strategies? Contact us.

Disclosures and footnotes

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.

Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

Factor funds are subject to investment style risk, which is the chance that returns from the types of stocks in which the fund invests will trail returns from U.S. stock markets. Factor funds are subject to manger risk, which is the chance that poor security selection will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.