Factor-Based Investing Gels With Vanguard's Investment Principles

May 16, 2018 — 2:08 PM EDT

Vanguard has long been a proponent of low-cost, passive investing, and even though it recently launched factor-based investment products that are actively managed, it's not a departure from the fund company's investment philosophy.

That's according to Doug Grim, senior investment strategist at Vanguard Investment Strategy Group, who said in a Vanguard Q&A session that even factor-based products, which track specific criteria, whether those are volatility or momentum, gel with the fund manager's investment philosophy, which is focused first and foremost on goals. "Active has been rooted in our philosophy forever," said Grim. "If you think about when we launched our first index product in the '70s, all we had at that time was active products. And we've been launching active products ever since then."

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In February, Vanguard launched six new factor-based ETFs that it said marked the first actively managed ETFs in the U.S. as well as one factor-based mutual fund. The five single-factor ETFs aim to achieve returns by being exposed to certain factors: minimum volatility, value, momentum, liquidity and quality. All five products will have an estimated expense ratio of 0.13%. The sixth ETF and mutual fund will invest based on multiple factors and will come with an expense ratio of 0.18%.

According to Grim, in order for actively managed products to work at Vanguard, they have to be offered to clients in a low-cost way. What's more, he said that active products aren't for everyone, with index investing the best place to start out. Grim noted that active investors have to engage in thorough due diligence to assess the portfolio manager and the process of investing and be patient once the investment is made.

"For us the difference with factors is it's just another type of active strategy. You've got traditional active, bottom-up stock selection, or quantitative active where you're using proprietary signals to try to generate alpha over time," said the fund manager. "Factors is really more transparent, more rules-based, targeting well-known characteristics that are out there that have been well-documented, and trying to do it in a more risk-controlled way. And we think it fits as a result of that; it fits very well within our philosophy."

Vanguard isn't the only fund company getting into the factor ETF market. In January, Fidelity Investments revealed that it is expanding its factor-based ETF offering, announcing the launch of two international factor-based ETFs. In a press release, the Boston-based investment firm, which has more than $300 billion in ETF assets under management, announced the launch of the Fidelity International High Dividend ETF (FIDI) and the Fidelity International Value Factor ETF (FIVA).