Most investors know Vanguard for its lineup of ultra-cheap index funds. But it's a small, under-the-radar, actively managed exchange-traded fund (ETF) that's been steadily beating the S&P 500.
The Vanguard U.S. Momentum Factor ETF (VFMO 0.96%) doesn't get much attention, and Vanguard doesn't really promote it. It's part of the company's factor ETF lineup that it launched in 2018. It includes five active funds managing a combined $4 billion, a success story for most issuers, but not by Vanguard standards.
In terms of performance, though, the Vanguard Momentum Factor ETF has been a hit. And it needs to be considered for more portfolios.
Image source: Getty Images.
How the fund constructs its portfolio
Vanguard uses a rules-based quantitative model to select stocks of all sizes with strong recent performance. In defining "momentum," it looks at a stock's total return compared to its relevant benchmark over the past seven- and 12-month periods.
By looking at performance over shorter and longer time frames, it aims to identify sustainable momentum patterns instead of just short-term bounces. Stocks are then weighed by their momentum factor.
Performance and key metrics
| Metric | Momentum Factor ETF | Vanguard S&P 500 ETF |
|---|---|---|
| Expense ratio | 0.13% | 0.03% |
| Assets under management | $1.7 billion | $991.3 billion |
| Holdings | 652 | 505 |
| Small-cap allocation | 29% | Less than 1% |
| Three-year return (annualized) | 26.2% | 21.3% |
| Total return since VFMO inception | 221% | 216% |
| Top sectors | Industrials (22%) Healthcare (20%) Technology (17%) | Tech (35%) Financials (12%) Communication services (11%) |
| Top holdings | Micron (1.1%) AMD (1.1%) KLA (1%) | Nvidia (7.9%) Apple (6.5%) Alphabet (6.5%) |
Data source: Vanguard.
The clearest takeaway from the fund's profile is that it looks nothing like the Vanguard S&P 500 ETF (VOO +0.39%). Sector composition is very different; market cap composition is very different. Overlap between the two ETFs is just 23% of assets. That makes the Vanguard U.S. Momentum Factor ETF a great diversifier when paired with a broad U.S. stock market fund.
Another thing the fund doesn't have is a concentration problem. Just the top three positions in the portfolio have allocations of at least 1%. Contrast that with the Vanguard S&P 500 ETF, which has a combined 21% in its three largest positions.
NYSEMKT: VFMO
Key Data Points
The all-cap exposure of the Momentum Factor ETF does create a riskier profile than the broader market. With nearly 30% of the portfolio in small caps, it's roughly 30% more volatile than the S&P 500.
The long-term outlook for this fund is positive. History has demonstrated that the momentum factor does one of the best jobs of producing excess returns over time. Over a 40-year period from 1976-2016, the momentum factor beat the MSCI World index by about 3% annually with only modestly higher risk.
Vanguard has become such a giant in the industry that some truly undiscovered gems fall through the cracks. Its U.S. Momentum Factor ETF is one of them. It doesn't have the typical look of a Vanguard index fund, but it delivers the goods.
