Vanguard's ETF struggle illustrates active funds' challenges

A big name and past success isn’t enough to persuade advisors to buy into active products

Vanguard's ETF struggle illustrates active funds' challenges

Vanguard has built itself into a formidable investment titan; not only has it become a key player in the low-cost revolution, but its Canadian business has also carved out a decent top-three ranking in terms of ETF assets managed. But a new report suggests that even the biggest company could have an Achilles’ heel in the active space.

“Two months since inception, four of the six active factor funds [Vanguard launched in the US] have seen zero net asset inflows,” reported The four funds in question were the Vanguard US Liquidity Factor ETF (VFLQ), the Vanguard US Minimum Volatility ETF (VFMV), the Vanguard US Quality Factor ETF (VFQY) and the Vanguard US Value Factor ETF (VFVA).

The company’s other new active products have seen some action: the Vanguard US Momentum Factor ETF (VFMO) has managed to pull in less than US$2 million in net assets, while the Vanguard US Multifactor ETF (VFMF) saw a decent US$11 million.

Speaking to, Vanguard Head of Global Product Management Matt Jiannino said getting advisors to sign onto a new active manager takes time and effort spent on education — something even a strong brand name like Vanguard’s can’t paper over.

Another hurdle is that due diligence desks can sometimes require as much as three years of tracked live performance, particularly in the active space, before they even consider a product. The discomfort is acute for single-factor active ETFs, according to one expert, because the market rhythms and cues that dictate one factor’s success can be difficult to read.

“There's little evidence so far that any investor has figured out how to time the market with factors,” Elisabeth Kashner of FactSet told “It's not surprising that the only fund with real pickup is the multifactor fund.”

Kashner added that the values investors associate with Vanguard may be playing against the new active ETFs; they’re high-quality and low-cost, but “they're not really ‘Boglehead’ products—they introduce significant complexity to a portfolio”.

But as the report points out, factor investing isn’t completely active; factor-based funds use quantitative approaches to determine stock weightings within their portfolios. However, the manager ultimately has the discretion to make investment decisions.

Another possibility is that the near-decade-long bull run in US stocks has given investors a taste for passive funds. Some say the return of volatility is resurrecting the case for active managers, but for now, investors’ appetite for such providers and products may be low.

“What a statement that is about how investors feel about active management right now,” said Stephen Blumenthal, tactical ETF strategist and head of CMG Capital Management Group. “This is the type of investor behaviour you see in late stages of a bull market, when everyone is piled into index investing.”