Vanguard Launches Actively Managed Stock ETFs for the First Time

Vanguard Ventures Into Active ETF Management, Challenging Its Own Legacy

New York, NY – January 26, 2024 – Vanguard Group, The Investment Company, known as a champion of low-cost, passively managed index funds, is making a meaningful move towards active investment strategies. The firm announced plans to introduce three new actively managed Exchange Traded Funds (ETFs), marking its first foray into actively managed stock ETFs. Previously, Vanguard offered only actively managed fixed income ETFs alongside a substantial portfolio of passively managed funds and institutional separate accounts managed in partnership with firms like Wellington Management.

Active Management involves a team of Portfolio Managers actively selecting the stocks included in the ETF, a contrast to passive indexing where funds mirror a specific market index.

For decades, Vanguard has built its reputation on the principles of passive investing, where funds aim to replicate the performance of a target index with minimal management intervention. This approach has historically resulted in exceptionally low expense ratios, making Vanguard a favorite among cost-conscious investors.

The Long-term Advantage of Passive Investing

Historically, Passive Investing has consistently outperformed Active Management over longer time horizons. Data reveals that over the past 15 years,indexes like the S&P 500 have delivered strong returns,while the majority of actively managed funds have struggled to match or exceed that performance.

According to the S&P Dow Jones Indices Versus Active (SPIVA) Scorecard, approximately 92% of actively managed large-cap mutual funds underperformed the S&P 500 over the past 15 years. This gap in performance tends to widen as the investment timeframe extends.

While Active funds have shown pockets of outperformance,those frequently enough coincide with market downturns. Over the last 25 years, Active Management has only exceeded the S&P 500 in 2005, 2007, and 2009 – years heavily impacted by the Global Financial Crisis. Visual Capitalist data indicates that in 2022, a bear market, 51% of Active Funds underperformed their benchmarks.

Time Horizon	Percentage of Active Funds Underperforming S&P 500
15 Years	92%
10 Years	89%
5 Years	70%

The Rising Popularity of Active ETFs

Active ETFs are a relatively recent development, gaining traction following an SEC ruling in 2019 that streamlined their introduction without requiring daily holdings disclosure.The increased flexibility has fueled a surge in their popularity.

investor interest in Active ETFs spiked during the market volatility of the first half of the year. According to TD Securities,the first half of 2023 saw $127 billion in net inflows into U.S. actively managed equity funds, compared to $191 billion into passive ETFs – representing approximately 39% of total inflows, a record for that period. July 2023 witnessed a record $44.8 billion flowing into Active ETFs, as reported by Morningstar. By May 2023, the number of Active ETFs had surpassed Passive ETFs, with 84% of all new ETF launches in the past year being actively managed.

Did You Know? The Active ETF market has experienced significant growth in recent years, driven by investor demand for strategies that can possibly outperform traditional benchmarks during volatile market conditions.

Vanguard’s New Active ETF Offerings

Vanguard’s new equity ETFs will be managed by Wellington Management, the firm currently overseeing many of Vanguard’s active mutual funds. SEC filings from August 18 revealed three new funds:

• Vanguard Wellington U.S. value Active ETF (VUSV) – a large-cap value fund led by David palmer.
• Vanguard Wellington U.S. Growth Active ETF (VUSG) – a large-cap growth fund managed by Brian Barbetta and Michael Masdea.
• Vanguard Wellington Dividend Growth Active ETF (VDIG) – a large-cap blend fund overseen by Peter Fisher.

These new ETFs are modeled after existing mutual funds managed by Wellington for Vanguard. Preliminary analysis by Morningstar indicates expense ratios of 0.30% for the value fund, 0.35% for the growth fund,and 0.40% for the blend fund. While higher than Vanguard’s exceptionally low passive fund fees (some as low as 0.03%),they remain competitive compared to industry averages. morningstar notes these fees fall within the bottom decile for value and growth funds, and the bottom third for blend funds.

Pro Tip: When evaluating ETFs, consider not only the expense ratio but also the fund’s investment strategy, ancient performance, and the experience of the portfolio management team.

Vanguard’s rapid growth as an ETF provider and the increasing appetite for Active Management are key drivers behind this strategic expansion.

Understanding Active vs. passive Investing

Active Investing involves frequent trading and research in an attempt to beat the market. Passive Investing, on the other hand, aims to match the market’s performance by investing in a broad range of assets. Both approaches have their pros and cons, and the best choice depends on an investor’s risk tolerance, investment goals, and time horizon.

The Role of Expense Ratios

Expense ratios represent the annual cost of owning an ETF, expressed as a percentage of assets under management. Lower expense ratios generally translate to higher net returns for investors. However, it’s significant to remember that low fees don’t guarantee success, and investors should consider the overall value proposition of a fund.

Frequently Asked Questions About Vanguard ETFs

1. What is the difference between Active and Passive ETFs? Active ETFs are managed by a team that actively selects investments, while Passive ETFs track a specific index.
2. What are Vanguard’s new Active ETFs focused on? the new ETFs target U.S. Value, U.S. Growth, and Dividend Growth segments of the market.
3. How do Vanguard’s Active ETF fees compare to its Passive ETF fees? Active ETF fees are higher than Passive ETF fees, but remain competitive within the industry.
4. What is the SPIVA Scorecard? The SPIVA Scorecard tracks the performance of Active Funds against their benchmarks over various time periods.
5. Why are Active ETFs becoming more popular? Increased market volatility and investor appetite for potentially higher returns are driving demand for Active ETFs.

What are your thoughts on Vanguard’s move into actively managed ETFs? Do you think this signals a broader shift in the investment landscape?

Share your opinions and join the conversation below!

How might Vanguard’s move into active ETF management impact its long-held reputation for low-cost, passive investing?

A Shift in strategy: Vanguard Enters Active ETF Management

For decades, Vanguard has been synonymous with low-cost, passively managed index funds and Exchange Traded Funds (ETFs). However, in a notable departure from its established philosophy, Vanguard has announced the launch of its first suite of actively managed stock ETFs. This move signals a potential shift in the investment landscape and offers investors new options within the Vanguard ecosystem. The initial lineup focuses on specific market segments, aiming to outperform benchmarks through skilled portfolio management. This is a major development for investors considering active vs.passive investing strategies.

Understanding the New Vanguard Active ETFs

The newly launched etfs aren’t a wholesale abandonment of Vanguard’s passive roots. Instead, they represent a targeted expansion into areas where active management may offer a demonstrable edge. Here’s a breakdown of what we know:

Focus areas: The initial ETFs concentrate on growth, value, and dividend-focused strategies within the U.S. equity market.

Experienced portfolio Managers: Vanguard has assembled teams of experienced portfolio managers to oversee these funds, leveraging internal expertise.

Active Share: Vanguard has indicated a commitment to a relatively high “active share,” meaning the portfolios will deviate significantly from their respective benchmarks, indicating a genuine attempt at outperformance.

Expense Ratios: While still competitive, the expense ratios for these active ETFs are higher than Vanguard’s traditional index ETFs. Investors should carefully consider the cost-benefit trade-off. Expect ratios in the 0.20% – 0.30% range, depending on the specific fund.

Why the Change? vanguard’s Rationale

Vanguard’s decision to enter the actively managed ETF space isn’t arbitrary. Several factors likely contributed:

Investor Demand: Growing demand for actively managed strategies, particularly among investors seeking to navigate volatile market conditions.

Market Inefficiencies: Identifying specific market segments where active management can potentially exploit inefficiencies and generate alpha.

Competitive Pressure: Responding to the increasing popularity of active ETFs offered by competitors like Fidelity and Capital Group.

Technological Advancements: Utilizing data analytics and quantitative tools to enhance portfolio construction and risk management. This includes leveraging financial modeling and algorithmic trading.

Comparing Vanguard’s Active ETFs to Passive Alternatives

The core question for investors is: how do these active ETFs stack up against Vanguard’s renowned passive offerings? Here’s a comparative look:

| Feature | Vanguard Passive ETFs | Vanguard Active etfs |

|——————-|———————–|———————-|

| Management Style | Passive (Index Tracking) | Active (Outperformance) |

| Expense Ratios | Typically very low (0.03% – 0.10%) | Higher (0.20% – 0.30%) |

| Potential Returns | Benchmark Returns | Potential for Outperformance (or Underperformance) |

| Tax Efficiency | Generally High | Potentially Lower |

| Portfolio Turnover| Low | Higher |

Investors should weigh the potential for higher returns against the increased costs and risks associated with active management. Consider your investment goals, risk tolerance, and time horizon when making a decision.

Benefits of Vanguard’s Active ETF Approach

Despite the higher costs, Vanguard’s active ETFs offer several potential benefits:

Downside Protection: skilled portfolio managers can potentially mitigate losses during market downturns.

Alpha Generation: The possibility to outperform market benchmarks through strategic stock selection and market timing.

Targeted Exposure: Access to specific investment themes or strategies not readily available through passive ETFs.

Vanguard’s Reputation: Leveraging Vanguard’s established brand and commitment to investor interests. This builds investor confidence.

Practical Tips for Evaluating Vanguard Active ETFs

Before investing in Vanguard’s new active ETFs, consider these practical tips:

1. Review the prospectus: Carefully read the fund’s prospectus to understand its investment strategy, risks, and fees.
2. Assess the Portfolio Manager’s Track Record: Research the experience and performance of the portfolio manager(s) overseeing the fund.
3. Compare to Benchmarks: Evaluate the fund’s performance against its stated benchmark over various time periods.
4. Consider Your Portfolio Allocation: Ensure the ETF aligns with your overall asset allocation and investment objectives.
5. Monitor Performance regularly: Track the fund’s performance and make adjustments as needed.

The Role of Anleihen-ETFs in a diversified Portfolio

While Vanguard’s new offerings focus on equities, remember the importance of diversification. Anleihen-ETFs (bond ETFs), like those offered by ING in partnership with Vanguard, play a crucial role in stabilizing a portfolio and providing regular income. Combining actively managed stock ETFs with passively managed bond ETFs can create a well-rounded investment strategy. This is particularly relevant in the current economic climate, where interest rate risk and inflation are key concerns.