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How to invest

What are factor-based funds?

6 minute read

Factor-based funds are a form of actively managed funds. They purposely "tilt" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices to achieve specific risk and return objectives. 

But they come with significantly more risk than you'd experience investing in the broader stock market.

Who might invest in factor funds?

Factor funds may be appropriate for you if you're an experienced long-term investor who wants to pursue specific factors but are looking for more transparency than you'd find in a traditional actively managed fund.

While we don't expect any of these funds to serve as your core investment, you may use them to tilt a portion of your portfolio in an attempt to augment its performance.

Factor timing is extremely difficult, and strategies that attempt to do so are ill-advised. So be sure you have the long-term patience needed to stick with a factor-based investment strategy.

A FEW THINGS TO THINK ABOUT BEFORE YOU INVEST

Factor funds are high-risk investments that should be used only by investors who:

  • Fully understand the risks and potential benefits of each factor.
  • Can financially and emotionally handle higher degrees of risk.
  • Consider these funds to be long-term investments.

Factor returns can be cyclical, so you could experience sharp and lengthy periods of underperformance compared with the broader stock market.

If you have questions about whether factor funds might help meet your investment goals, we strongly recommend that you consult with a qualified investment advisor.

Vanguard's approach to factor-based investing

We take a deliberate approach when developing factor funds, choosing to target only those factors that have undergone exhaustive analysis and that we believe could have long-term benefits for our investors.

These new funds will take a transparent, rules-based approach to offering consistent exposure to specific factors. And of course, all of our factor funds are offered at the low costs you'd expect from us.

After extensive research, we've created funds focused on these 6 factors based on their potential for long-term capital appreciation:

Minimum volatility

For investors who want to focus on stocks with lower volatility relative to the broad U.S. stock market.

Vanguard U.S. Minimum Volatility ETF (VFMV)

Value

For investors who want to focus on stocks that have relatively lower share prices relative to their fundamental values.

Vanguard U.S. Value Factor ETF (VFVA)

Momentum

For investors who want to focus on stocks with strong recent performance.

Vanguard U.S. Momentum Factor ETF (VFMO)

Liquidity

For investors who want to focus on stocks with lower measures of trading liquidity in the hope of accessing the potential premium associated with those stocks.

Vanguard U.S. Liquidity Factor ETF (VFLQ)

Quality

For investors who want to focus on stocks with strong fundamentals, which may include higher operational earnings and balance-sheet quality.

Vanguard U.S. Quality Factor ETF (VFQY)

Multifactor

For investors who want to focus on stocks that combine relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals.

This is being offered as both an ETF and a mutual fund.

Vanguard U.S. Multifactor ETF (VFMF)

Vanguard U.S. Multifactor Fund Admiral™ Shares (VFMFX)

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

The Factor Funds are subject to investment style risk, which is the chance that returns from the types of stocks in which a Factor Fund invests will trail returns from U.S. stock markets. The Factor Funds are also subject to manager risk, which is the chance that poor security selection will cause a Factor Fund to underperform its relevant benchmark or other funds with a similar investment objective, and sector risk, which is the chance that significant problems will affect a particular sector in which a Factor Fund invests, or that returns from that sector will trail returns from the overall stock market. 

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.