Vanguard to close a US ETF for the first time

Vanguard has announced it intends to close a US exchange traded fund, marking a first for the asset manager despite its 20 years in the market.

The firm intends to liquidate the $44mn Vanguard US Liquidity Factor ETF in November, the firm announced.

The fund, the smallest in its six-fund suite of factor-tilting products, has failed to gain scale since its 2018 debut. The remaining funds have a combined $3.4bn in assets, the manager noted in the release.

“We continue to add new products that have investment merit and meet investors’ preferences, change advisers and mandates to improve investor outcomes, and eliminate funds that lack a distinct role in investors’ portfolios,” said Dan Reyes, head of Vanguard’s portfolio review department, in the announcement.

This article was previously published by Ignites, a title owned by the FT Group.

The firm continues to support factor investing, the press release states.

However, at least one analyst is not sure about the firm’s commitment to a suite of products that have not been the blockbusters that investors and market watchers have come to expect from the asset management group.

“Poor performance, low usage (assets) and the manager departure are not unique to Liquidity Factor ETF, which would argue for this being a sign of things to come,” said Jeffrey DeMaso, head of research at Adviser Investments. For example, another fund in the suite, the US Minimum Volatility ETF, had just $69mn in assets as of the end of August, he noted, citing data from Adviser Investments’ database.

In addition, the factor suite’s founding portfolio manager, Antonio Picca, departed from Vanguard in July, he noted.

Other shops have also recently shaken up their smart beta and factor lines. Nationwide shut down its three smart beta ETFs earlier this year. Meanwhile, WisdomTree, Principal, Alpha Architect and Franklin Templeton all have made significant tweaks to their families.

Vanguard’s history with factor investing has been complex. A decade ago, in the early days of smart beta, the firm chafed at the idea of factor-tilts being a replacement for traditional market-cap-weighted indices.

“We actually think there is a discussion to be had broadly about calling a spade a spade, not having an active strategy cloaked in an index Halloween costume,” Joel Dickson, now the firm’s head of advice methodology, told Ignites in 2014.

Vanguard launched its factor strategies as the firm’s first active equity ETFs, noting at the time that such strategies were well suited for the transparent ETF wrapper.

But the rollouts may have been too different and too late to break into the fast-growing space, said Bryan Armour, head of passive strategies, North America, for Morningstar.

“Most investors had already settled into the best-in-class factor ETFs by this point,” said.

Overall, strategic beta ETFs in Morningstar’s database attracted $100.3bn during the first eight months of the year while Vanguard’s six factor ETFs, meanwhile, attracted just $372mn.

In addition, the funds’ higher-active-risk approach does not necessarily mesh with the firm’s cheap beta reputation, Armour said.

Performance has not helped these funds win fans either, analysts said.

US Liquidity Factor returned 7.1 per cent during the three-years ended August, trailing the fund’s stated benchmark, the Russell 3000 Index, by 4.8 percentage points, Vanguard’s website shows. The fund’s year-to-date declines of 16.9 per cent, however, are on par with the index.

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignites.com.

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