VFMF
Vanguard U.S. Multifactor Fund
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Whats the deal with Vanguard 'Factor' ETFs (VFMV, VFMO, VFMF, etc.)
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Something like VFMF (Vanguard multi factor) works pretty well as an all in one if you prefer to not get heavy concentrations in any one stock. Technically active but not really.
Basically, they have some money, right? And instead of just using that money to invest, they are borrowing money (leverage) to use that in combination with their own money to invest in a diversified portfolio of stocks, specifically ETF's and mutual funds. An ETF is a collection of investments like stocks or bonds. A mutual fund is when a group of investors pool money together and a fund manager takes care of it. The manager either buys a lot of diversified stocks (actively managed) or the fund just mirrors an index like the S&P 500 (passively managed). Every person owns a tiny piece of the money in the pile. Using leverage is a double-edged sword because if the market goes up, the money pile grows fast. If the market goes down, it shrinks fast. The measure of how amplified that difference is, is called volatility. High volatility means stocks shrink or grow fast, low volatility means its much more moderated. A leveraged position becomes more volatile because the more money you put in a stock, the more of your own money is put at risk. Let's say you put $10k on an ETF like QQQ (tech), half of your money being leveraged (borrowed money). That is 2x leverage. This means if the market dips 10%, the amount you lose is 2x that because your equity (the money you truly own, subtracting what you owe) absorbs that impact instead of the money you borrowed. So instead of you losing $500 on your equity, you lose $1k. When you leverage money, the broker you leverage money from will require a maintenance margin, which means your equity must always be at a certain percentage of total assets. If you go below this percentage, the broker will issue a margin call which forces you to deposit cash to meet the minimum or sell assets to reduce the loan. If you cannot do this, the broker sells your investments automatically. When you have a leveraged position, every loss you take is felt by your equity, which means you are much more likely to be issued margin calls. The equity itself is put at risk which means you're basically gambling your money for a stock position to go up when your leverage is as high as 3.2x (the leverage we're seeing in the post), even if the portfolio is diversified. EDV is interest-rate sensitive which means that the value of EDV becomes volatile when interest rates change. This is dependent on if the Fed (the federal reserve) fears economic recession or inflation. If they fear economic recession, they cut the interest rates, which offsets losses and allows some breathing room if there's a sharp economic downturn. But if they fear inflation, they raise rates, which amplify losses. Since EDV holds long-term bonds (25-30 years), they are really sensitive to interest rate changes, because the interest rates and bond prices move in opposite directions. The duration of bonds has a big effect on how volatile it is. EDV is a good investment when inflation and interest rates by extent is stable, but a horrible one when it's not. VFMF is designed to reduce swings by holding less volatile stocks. It's still doesn't eliminate risk because it can still face market-wide crashes. With a 3.2x leveraged position, this reduction in risk is mostly negated. VTIAX is an international stock fund, which means its exposed to foreign economies, currencies, and political risks. This means any exchange rate swing can amplify your gains or losses. This is less correlated with U.S. stocks, but it can still drastically fall in global recessions. VOO tracks large-cap American companies. It's pretty ordinary. VTI and VTSAX covers all American stocks, from small-cap to large-cap companies. Small- and mid-cap stocks are more volatile, and market swings impact VTI and VTSAX broadly. You can see that their portfolio reacts heavily to economic and political events. With 3.2x leverage, if some sanction results in a 5% total market crash, his equity (which is $5M) is reduced by 16% which is a staggering $800k loss. That's only 5%, and if they face a margin call, losses are much worse. This is why this strategy is precisely horrible.
Ok yeah, VFMF looks great for US all-cap. I was recently perusing the Dimensional ETFs and was honestly overwhelmed with all the options. I'll need to do some more research to determine appropriate allocation. Definitely seems like a balance between keep it simple stupid, diversification across all market caps and all geographies, and ease of rebalancing ... Anyways - big inspiration. Keep up the good work!
It's like 60/40 USA/Ex-USA. The rest is... complicated because it's some index funds, but then there's VFMF which is like one third each of small/mid/large. I'm already married! I'm due in May.
I sold a few smart-beta positions when i withdrew some to buy the home. Now it's just VFMF teasing me that is left. I'd love for it all to be smart-beta but I'd get wrecked by taxes if I sell anything from my broad index funds, they have hundreds of thousands in unrealized gains now (See positions). Why would I hedge? Isn't that the same as simply, not investing as much in stocks?
How are you getting those returns when you mostly hold broad market index funds? (I guess a small amount in VFMF). Is it due to leverage only?
You have simulations and backtests for this portfolio? I went back to look at this and it hasn't really performed all that well in general. 2018 DFIVX didn't do well, which dragged the performance through the ground, especially with leverage. 2020 the performance wouldn't be great either because there wasn't as much of a turnaround in VFMF (which would arguably take up most of the pie) when compared to even SPY. Monte Carlo wouldn't be that extensive due to lack of VFMF data. Maybe you can just mix a bunch of profitablity/value/momentum etfs as a proxy but I doubt that would help. Even then, with a proxy of some kind, returns wouldn't be anything special for the last 10 years. I don't see any concrete data to suggest this outperforms even SPY over the last 10 years let alone SSO mixed with some international exposure.
Smart beta because VFMF gives you exposure to the market (beta) but using weighings, methodology and screens to do so only with stocks that are cheap, with high momentum, highly profitable (the factors that add additional returns). So you get overall beta return and risk, plus the extra on top. VFMF is best one IMO: If you look at the metholodgy Vanguard put together, it's basically perfect. I love every step they take from the value-trap screens, to the equal weighing of small/mid/large cap to the way they assign a multi-factor point, etc.
Out of curiousity, why do you like VFMF over the otger indicies? What exactly do you mean by "smart beta"?
2. Because it would cost me a lot in taxes. Like sure, I want to sell VOO and buy more VFMF. But then I'd pay taxes on the $47K of unrealized gains. I don't think it's worth it.
Don’t understand why everyone doesn’t do it? You said yourself “it’s torture” and “I’m about an 11% drop from forced liquidation. Smart-beta has helped, ETFs like VFMF are down like 6% less than the broad market. I’m staying optimistic though.” lol this will not end well
Imagine calling VFMF and AVDV a "value" ETF. Sure, value is one of their screens in their methodology, but they are so so so much more.
Great content here, I read all the guide and a bunch of comments. Can you summarize your approximate allocation by asset class without giving away too much? I tried backtesting an earlier version of your portfolio which you recommended as 60/25/15 VFMF/DFIV/IEMG by replacing those funds with US Stock, ex-US Value, and Emerging Markets, but it sounds like you are more broadly diversified now into commodities and other types of assets. In my layman's understanding, that update, with rebalancing, should be a much more robust portfolio over the long term. I can't say how reasonable it is to simulate VFMF with US Stock, as that specific fund hasn't existed for more than a few years. Happy to share what PortfolioVisualizer spits out if you're willing to play along. There may be a HFEA angle here - can't help it :-)
Yes basically. Risk tolerance is personal. The stock market fell a bit over 50% in 2008 and it probably will again at some point. If you are okay losing that much, then all stocks is appropriate. If not, mix in more bonds. Global equity index: VT, or sliced up domestic VTI and foreign VXUS Factor titled equities: VFMF CAPE IMTM FNDF Bond indexes: BNDW SCHP
Vanguard has several "factor" funds that don't have as much tech in them. For example, VOO (S&P 500 ETF) has 30.6% in Information Technology. Other funds have lower concentrations, like VFVA with 5.3% in Tech, VOOV with 8.1% in Information Technology, or VFMF with 10.7% in Tech.
> If I had to sit down and think the ideal way to build a smart-beta fund, it would look very similar to how VFMF does it. Can you explain this a bit more? What metrics are you looking at when you are making this comparison? How is smart-beta different than the beta itself of the fund?
Its stock selection and portfolio construction is excellent. If I had to sit down and think the ideal way to build a smart-beta fund, it would look very similar to how VFMF does it. The quantitative group over at Vanguard really knocked it out of the park on this one. I’m just hoping they make similar versions for foreign markets
[https://investor.vanguard.com/investment-products/etfs/profile/vfmf#performance-fees](https://investor.vanguard.com/investment-products/etfs/profile/vfmf#performance-fees) Why do you consider VFMF awesome, btw? How is this better that the boomer indexes you have shown in your post?
Sorry, VFMF. That makes sense. Leveraged ETF’s is the other scenario I’ve been considering. I’ve had a hard time finding anything with smart-beta characteristics in a leveraged offering. FNGU is one but I would want some others to diversify.
Tax loss harvesting will explain why I don't have some of them any more. And not wanting to realize gains will explain why I have some I don't want or repeated stuff (like VOO and VTI). If I could start again, I'd do 60/25/15 VFMF/DFIV/IEMG. All smart-beta except EM (where it's too expensive IMO to implement). But over time, as you TLH, you'll end up with more positions. Complexity is the price you pay for lower taxes I guess.
Not a father but I put my nieces' 529s in 100% stocks. They are currently younger than yours and I don't intend to reduce it until a couple years out. But you obviously have more responsibility and more money at stake. You don't want to go too high risk and be uncertain how much you (and/or they) will have / need to save, but you also don't want to go too low and give up potential gains and maybe underperform the rate of tuition inflation. You listed a bunch of distribution-focused funds, including ones that use option premiums. If a high distribution rate gives you more confidence in their performance, then I say go for it. But in general I don't see a point in shuffling money around from one pocket to the other and back again. For a medium risk portfolio: 15% VTI, 15% VFMF, 10% VXUS, 25% BNDW, 10% JPST, 10% SCHP, 10% DBMF, 5% IAU
Listen youself; this is the guy who ran their factor funds for 5 years until recently, and they discuss passive vs active. https://youtu.be/DH1pJwRn-gQ Basically, passive vs active is oversimplified, in reality everything is active. You have to choose what you invest in, even cap weighting is a choice more for convenience and cost than theoretical reasons. Index funds just have th3 decisions made at the active level. Vanguard considers active to be basically everything outside of cap weighted indexes. But there is A WORLD of difference between a 20 stock, proprietary active mutual fund at 1% MER, and a factor etf tilt at 0.15-0.25%. Take VFMF from vanguard, DFAT from dimensional, and AVUV from avantis. These are rules-based, transparent indexes. Antonio's point in the podcast is that the active is in the management of the fund, not the choice of securities. The reason is that you NEED the flexibility if tracking a factor that changes fast enough. Say there are inflows, and Instead of buying a representative slice of the index just to rebalance in 3 weeks and sell, they use inflows to buy the stocks they want to buy based on the rules-based Index, and sell those going out of the index if there are outflows. It's active to lower transaction costs. Factor investing is just further going down the index rabbit hole, academically. Indexing is based off the market factor,the oldest and most powerful one. This is also known as the equity premium. Factor investing is tilting either toward or away from the other factors, such as value, size, profitability, investment, and momentum. Why would you want to do this? Because the market portfolio is the best portfolio for the average investor. But you are likely already tilting away from the market portfolio if you are younger(more Equity) or older(more bonds) than the market portfolio, which would be a mix of stocks and bonds. You are doing that because you are not the average investor by age, and you know that. Th3 same can be said with factors like small cap value. Historically they have had significantly higher returns, because they are significantly riskier companies, and there have been long periods of underperformance, follow by Bursts of outperformance.but over the long term. Risk vs return, just like why people would buy equities over bonds
I'm about an 11% drop from forced liquidation. Smart-beta has helped, ETFs like VFMF are down like 6% less than the broad market. I'm staying optimistic though.
35 USA. ~250k in this brokerage account What started years ago as a simple three fund portfolio has spiraled into this monstrosity that overwhelms me when I want to buy more ETFs. A simple breakdown shows me at 85% stocks, 10% bonds and 5% short-term reserves. BND 12% GOVT 8% VB 4% VBR 3% VDE 15% VFMF 4% VO 4% VTEB 4% VTI 19% VUG 9% VWO 6% VXUS 12% I typically just dump money into VTI but is there a better fund I should be focusing on right now?
Still holding on. My positions (like VFMF) are down a lot less than the USA market because they are way less tech-heavy. And the multi-asset alternative fund (I have nearly a million in it) is up 20%, which makes up for most of the losses. If we drop a little more, I’ll probably have to unwind a bit.
The box spreads are up because rates have risen. And the two positions I hid (one is commodities, one is an actively managed alternative fund) are also up. And not all of my stock ETFs are down (my biggest ones, VFMF and VBR are flat to slightly up).
So small/micro-cap stocks are supposed to have borrow fees in excess of 30%? I'm not so sure. Looking at table 5 [here,](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3726227) low fee US-listed small caps have a weighted avg borrow fee of just 10 bps, and high fee small caps have a weighted avg borrow fee of 2.39%. Far from 20%+. And even if we consider VFMF to be an anomaly because of how small it is, LRGF and SMLF both have over 1B in AUM and still have very high borrow fees, especially compared to similarly sized or smaller single-style ETFs like QVAL, IMOM, FRDM, etc.
Professional investors might hold SPY, but would likely buy their own stock picks instead of a multi-factor ETF. The fewer people holding an ETF, the harder it is to borrow it, and the more the borrowing interest rate goes up. A minor point: VFMF is an ETF, and not a mutual fund. You cannot short a mutual fund - it only exists at one company, and does not trade on the stock market.
Smaller ETFs and securities have higher borrow rates; whether something is "multifactor" or not have nothing to do with it. At the small end, borrow rates are priced by algorithms based on market cap, etc without consideration of whatever it is; the algos don't even care if it's an ETF or if it's a stock. There is not enough interest/money in people shorting it for the algo writers to care. For example, VFMF has an AUM of $150 million... that's tiny. The borrow rates for it is treated as a micro-cap.
1) I much prefer having the knobs to change exposure to US, Int and EM independently (plus some amazing funds, like VFMF, are just worth having). 2) The portfolio should really be like 6-7 ETFs (and started that way) but due to TLHing over the years, has grown in number of ETFs. I was willing to bear the slightly higher complexity for the substantial tax savings'.
They weren’t around 3 years ago when I started the portfolio and I didn’t want to drastically increase the number of ETFs I use when the RAFI and multi factor funds that I started with are just fine. VFMF was an exception because of how phenomenal it is so I did grow my line up for that.
What do people think about factor funds like VFMF, IMTM, etc.? I'm wondering if I should move any money from total US market funds in my taxable account, or at least shift future investments. Are they too specialized to attract investors?
I would add AVDE, AVDV, VFMF and AVEM to that list. They are probably the best Small cap Value or Multifactor ETFs that are available. AVUV and AVUS recently grew past 1B in AUM and the others will likely follow in the next few years.
You can’t go wrong by dollar cost averaging into vanguard ETFs. VFMF, VTI, VBR, VOO, VEU, VOE, etc. Allocations vary but the important thing is being diversified across multiple countries, sectors, and company sizes.
VFMF is ~17% of the portfolio and my second largest (behind VBR). I have more VFMF than VEU, VWO, VTI and VOO COMBINED. Positions are in the OP.
VFMF doesn't seem like it causes much impact on your overall portfolio. It's less than 1% of it. Am I missing something? None of the mulfiactors seems to impact much, the portfolio is mostly concentrated in VOE, VTI, VOO, VWO and VEU
Gotcha, clearly I don't know much about DFA as you can see haha. Can't use their funds. Maybe I'll pay more attention once some more ETFs come out. Regardless, I see a ton of potential on VFMF, I think the methodology is a factor bull's dream come true. We'll see what happens!
VFMF rebalances almost daily, that's why it has such a high turnover (>100%). There's a Vanguard paper from Antonio that specifically explains why they rebalance so frequently and it's because they want the highest factor exposure out there. DFA, I thought, rebalanced much less frequently, look at DFFVX, it's got a turnover of 20%. Where'd you hear DFA rebalances daily? Everything else (except maybe Avantis) reconstitutes even less frequently. I'd say VFMF is one of the best ones out there in terms of maintaining strong factor loadings. If you don't like LCV and MCV, fine. I personally like getting factor exposure at all market sizes (so VFMF fits the bill) but I understand if you don't. But I wouldn't call that "lackluster", it's not a bad thing. Also, holding the value+momentum firms together like VFMF, or DFA does (with their momentum screen) is superior to picking value and momentum firms separately and owning both for many reasons (the diversification from correlation is more effective, you get stronger loadings, lower transactional costs, etc): [https://images.aqr.com/-/media/AQR/Documents/Insights/White-Papers/Long-Only-Style-Investing-Dont-Just-Mix-Integrate.pdf](https://images.aqr.com/-/media/AQR/Documents/Insights/White-Papers/Long-Only-Style-Investing-Dont-Just-Mix-Integrate.pdf) [https://www.aqr.com/Insights/Perspectives/Looking-for-the-Intuition-Underlying-Multi-Factor-Stock-Selection](https://www.aqr.com/Insights/Perspectives/Looking-for-the-Intuition-Underlying-Multi-Factor-Stock-Selection) Only time I've seen any one argue otherwise was AlphaArchitects, but I'm pretty sure they're wrong. And they've come out and argued against it any ways. You can see in this article, they show a combinational approach (like VFMF does) provides far higher returns: [https://alphaarchitect.com/2018/01/19/value-momentum-factor-portfolios/](https://alphaarchitect.com/2018/01/19/value-momentum-factor-portfolios/) As for the negative alpha, that's just from a short regression, I don't worry about it. I think it's better to look at the actual methodology and costs, instead of whatever alpha it has realized in two years. As for VBR, yeah, a quality screen is nicer but I'm sitting on a ton of gains, not gonna switch now.
VFMF scares me because it may not be rebalanced enough (DFA rebalances daily to maintain consistent loadings) and because in general (perhaps due to recency bias haha) I'm much more fond of targeting small value than large value, which you own a lot of with VFMF (especially seeing as how both the risk and behavioral explanations for value make a lot more sense for small) + because I'd much rather have the value names *and* the momentum names (for example), not the value + momentum names (you don't benefit as much from the styles' negative correlation with each other and you restrict your investable universe more than I'd like) + because (maybe irritanionaly) a crap ton of negative alpha (3% per year!) gives me alphaarchitect PTSD... I'm also pretty wary of SCV that doesn't screen for quality/profitability. VBR has a lot more junk in it than VIOV or IJS (committee-based index selection removes it inadvertently) or AVUV.
It might be more useful if you explained how VFMF is lackluster. I happen to think it is the best MF fund in the USA, surprised a factor enthusiast would think it's bad. As for VBR, sure it doesn't load as much as other offerings. But you shouldn't think of your portfolio in chunks of funds ("the best SCV fund, with the best MOM fund, etc"). You should think of the **overall** factor loads. VBR doesn't load as much as VIOV, but it loads more than VIOV per unit of expense and turnover cost, so I just hold more VBR than I would hold VIOV otherwise, and achieve my target loads, with a slightly lower ER.
VFMF is pretty lackluster and VBR is a mid-cap fund that pretends to be a SCV fund. VIOV, IJS or AVUV are all superior US SCV options.
SPY is not up 48% YTD, I think you just meant 1 year return? It’s not that different in theory, you’re right. I’m just much more optimistic about a global portfolio of smart beta over just SPY. VFMF for in strange is up 65% for the past year, so a substantial part of my returns have been from the ETFs themselves, not just the leverage. That’s why SPY is up 35% over the period I show above, while I’m up 90% (much more than just twice). Not a dumb question at all!
Nice one. But I have to ask, it looks like the top 4 holdings (VBR, VFMF, FNDC, FNDF) were underperforming the Nasdaq and SP500 in the longer term. Then why not doing it on the main indices instead of those?
Too little for a margin account unfortunately. I'd put it on VFMF though (one of my biggest positions now).
Reconsider it. Adds excellent cash income. Some cc etf do great. Just sell far OTM in your most boring funds. You’ll pickup barely anything but on a decent size balance, that’s okay. Caveat though as I don’t know how US tax handles it. Looks like not good volume. VTI nothing. VFMF none. If you can’t get deep OTM then no, no point.