Vanguard Effect for Smart Beta?

I have been thinking a lot about Vanguard’s push into factor investing1 and smart beta. I expect them to follow a path similar to how they approached moving into the robo-advisor space. Meaning, expect to see internal organic building rather than acquisition. Vanguard already has several funds in the factor and/or smart beta space. They are based on passive indices.2

Costs remain the most intriguing aspect of this. Many of the most popular offerings in the smart beta space are not exactly cheap.

Consider some of the biggest and most popular smart beta ETFs from firms like Blackrock, State Street and Powershares. They all cost considerably more then Vanguard’s offerings: The $5 billion dollar Powershares FTSE RAFI US 1000 ETF (PRF) has an internal expense ratio of 0.39%; the iShares Select Dividend ETF (DVY), with $17 billion in assets, has the exact same cost structure. The SPDR S&P Dividend ETF (SDY) manages over $16 billion dollars at 35 basis points.

Look for the “Vanguard Effect” to drive those costs lower – perhaps appreciably so. More on this before lunch . . .

More on this before lunch . . .




1. The Fama-French factor model – Beta, Size and Value – is the classic 3 factor model discovered by University of Chicago professor Eugene Fama and Dartmouth professor Ken French. There are now 5 and 7 factor variants as well.

2. The Vanguard Value ETF uses the CRSP US Large Cap Value Index; the Vanguard Dividend Appreciation ETF uses the NASDAQ US Dividend Achievers Select Index.

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