Momentum and P/E vs. Market Cap visualizations for new Vanguard factor ETFs and others

This guest article is authored by Bogleheads forum member lack_ey.  See  this forum post for additional commentary.

Vanguard’s factor funds, which launched in February 2018, provide yet another take on long-only factor investing within US stocks, joining similar mutual funds and ETFs from a crowded field of competitors. Six single-factor funds and one multi-factor fund seek to target the specified factors by choosing stocks that score well by the Vanguard Quantitative Equity Group’s criteria. For example, the value fund picks stocks based on three different value metrics: book-to-price, forward-earnings-to-price, and cash-flow-to-price.

One way to understand a fund’s portfolio is to run a regression on past fund returns against raw factor returns data. This yields the factor loadings. Unfortunately, this method is less reliable with a low number of data points, and daily factor returns from Ken French’s website are only available through the end of January at this point, so this is not an option for understanding the new Vanguard factor funds.

The alternative is to analyze a fund’s current holdings. This is the approach taken in this article.

Each graph below plots all of a fund’s holdings, with each dot representing a different stock. For each fund, two graphs are shown: forward P/E vs. market capitalization, and momentum vs. market capitalization. The vertical axis shows the market capitalization, while the horizontal is either forward P/E or momentum. The size of each dot corresponds to the fund’s weighting in the stock.

Individual stock data was taken from Morningstar and Yahoo stock pages on March 9, 2018. Fund holdings were the most recently available from the fund manager’s website at the time.

Summary and discussion

Vanguard’s new factor funds are very clearly not market cap weighted and reach deep into mid caps and small caps. All have significant weightings, not far from the 50% range, below $10 billion market cap. For those who believe factor weightings can achieve superior performance and more so in small caps (larger effect size in smaller stocks), this should look very attractive. The iShares factor funds focus almost exclusively on $10 billion and higher stocks, as do some competitors.

The Vanguard momentum and value factor funds, as well as the multifactor fund, seem to be achieving higher factor loads than the competitors as well. The multifactor fund looks to have more of a value tilt than the fundamental indexing products, all while having positive rather than negative momentum.

Goldman Sachs has the cheapest multifactor fund at 9 bp expense ratio, but its tilts are modest. Look at the weightings in all the largest stocks it has relative to in the S&P 500 or total market. At least it will have low tracking error.

Unsurprisingly, minimum volatilty funds tend to own stocks that didn’t stray too far from the market return.

We can clearly see what fundamental indexing accomplishes: a value tilt by reweighting securities. Compare FNDB and VTI. You see much the same securities but the leftward dots are weighted more with the fundamental indexing, with perhaps the biggest effects not actually visible on the plot (other than in the histogram bin) because the axes are chosen such that very high P/E values above 100 are off to the right side. This comes with a slight negative momentum load.

The existing Vanguard Quantitative Equity Group funds such as Vanguard Strategic Equity (coincidentally, ER = 0.18%) and Vanguard Market Neutral have evolved over the years and recently look like dedicated factor tilters. Strategic Equity looks pretty similar to to the multifactor ETF, to be honest, except excluding stocks above $30 billion, perhaps even better again from the perspective of those who want tilts in smaller stocks. Strategic Small-Cap Equity is similar but even smaller.

Graphs

With respect to all factor funds, the definitions used may not line up with what is plotted here. Vanguard’s new factor funds, according to jhfenton’s friend’s information, use three different metrics for each factor. For example, for value, that includes book to price, forward P/E, and cash flow to price. CRSP considers five value measures, as detailed in their methodology, and they are the index provider for Vanguard’s main US equity funds. As such, a lower score on these graphs may not necessarily mean a weak tilt: just one that doesn’t align as much with the metric shown. That said, there are still some important trends that can be captured here, and overall fund-wide impressions should be reasonably accurate. After all, most metrics for each factor should be significantly correlated.

In any case, the thumbnails below, each link to the full-sized image. For every pair of images, the P/E graph is on the left and momentum on the right. You compare the multi-factor funds and check out the last two graphs, which are for Vanguard’s market neutral fund, if only because the colors look red.

For fund comparisons open images for different funds in adjacent browser tabs and then use keyboard shortcuts to quickly flip between the two (Ctrl+PgUp and Ctrl+PgDn)

As a warning in interpreting the momentum graphs: these are scaled around 1 being a 0% return, but in the past year, the market as a whole was up. Check the total market fund as a reference for the average return. Other funds shifted left of the total market have negative (cross-sectional) momentum; those shifted to the right have positive momentum. Also, keep in mind that the value loading on momentum strategies and the momentum loading on value strategies varies over time. Over periods in which value stocks underperform, as in the window we examine here, they should be more at odds with each other.

Total market and S&P 500 index funds

Total market and S&P 500 index funds for reference:

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Vanguard single-factor funds

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ishares single-factor funds

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Multifactor funds

Multifactor funds from Vanguard, iShares, Goldman Sachs, John Hancock (run by DFA):
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Additional funds

Market cap-weighted size and value funds

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Powershares and Schwab RAFI (fundamental index) funds

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Vanguard Quantitative Equity Group funds

Some other Vanguard Quantitative Equity Group funds [WARNING: holdings data is more stale (out of date) for traditional mutual funds]:
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Addendum

Funds

Vanguard Value ETF (VTV) iShares Edge MSCI USA Value Factor ETF (VLUE)
Vanguard Mid-Cap Value ETF (VOE) iShares Edge MSCI Multifactor USA ETF (LRGF)
Vanguard Small-Cap Value ETF (VBR) iShares Edge MSCI Min Vol USA ETF (USMV)
Vanguard U.S. Value Factor ETF (VFVA) Schwab Fundamental US Broad Market Index ETF (FNDB)
Vanguard U.S. Liquidity Factor ETF (VFLQ) Schwab Fundamental US Large Co. Index ETF (FNDX)
Vanguard U.S. Minimum Volatility ETF (VFMV) Schwab Fundamental US Small Co. Index ETF (FNDA)
Vanguard U.S. Momentum Factor ETF (VFMO) PowerShares FTSE RAFI U.S. 1000 Portfolio (PRF)
Vanguard U.S. Quality Factor ETF (VFQY) PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ)
Vanguard U.S. Multifactor ETF (VFMF) John Hancock Multifactor Large Cap ETF (JHML)
Vanguard Total Stock Market ETF (VTI) Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC)
Vanguard U.S. Value Fund (VUVLX) Guggenheim S&P Smallcap 600 Pure Value ETF (RZV)
Vanguard Strategic Equity Fund (VSEQX) Schwab Fundamental US Small Co. Index ETF (FNDA)
Vanguard Strategic Small-Cap Equity Fund (VSTCX) PowerShares FTSE RAFI U.S. 1000 Portfolio (PRF)
Vanguard Market Neutral Fund (VMNFX) PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ)
iShares Core S&P 500 ETF (IVV) John Hancock Multifactor Large Cap ETF (JHML)
iShares Core S&P Small Cap ETF (IJR) Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC)
iShares S&P Small-Cap 600 Value ETF (IJS) Guggenheim S&P Smallcap 600 Pure Value ETF (RZV)
iShares Edge MSCI USA Momentum Factor ETF (MTUM)

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About

Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog

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