Vanguard US Quality Factor ETF

VFQY

Market cap $475M

With the S&P 500 pushing to higher and higher record levels in recent months, many investors are increasingly concerned about the bottom dropping out. Chasing momentum loses its appeal when valuations seem to be stretched uncomfortably thin.

Both the Vanguard U.S. Quality Factor ETF and the Vanguard U.S. Multifactor ETF have underperformed the Russell 3000 and S&P 500 since inception. VFQY and VFMF offer favorable valuation metrics versus the benchmark, but sector headwinds, macro sensitivity, and slow portfolio adjustments limit upside. Neither VFQY's quality screening nor VFMF's multifactor approach provided downside protection during major market selloffs.

Vanguard U.S. Quality Factor ETF holds over 400 U.S. stocks selected with quality metrics. VFQY has value characteristics and is well-diversified across holdings, sectors, and size segments. However, VFQY has lagged the Russell 3000 Index and at least four competitors since its inception.

VFQY offers diversified exposure to high-quality U.S. stocks, with a tilt toward mid- and small-caps and less reliance on mega-cap tech. The fund trades at a significant valuation discount but lags peers and benchmarks in profitability and long-term performance, especially during bull markets. VFQY's sector allocation favors industrials and financials, resulting in lower growth and higher volatility compared to tech-heavy rivals.

Vanguard U.S. Quality Factor ETF has a low expense ratio of 0.13% but underperforms due to limited tech exposure and high cyclical sector exposure. VFQY's portfolio includes nearly 400 stocks, with a tilt towards value stocks. The fund's high turnover ratio of 55% leads to higher transaction costs, negatively impacting performance compared to the S&P 1500 index.

Don't let these two ETFs slip through the cracks.

The Vanguard U.S. Quality Factor ETF has a diversified portfolio across market cap categories, resembling a value fund with a low price/earnings ratio. VFQY's performance has lagged the broader market and other quality ETFs, with higher volatility measures than expected. Despite attractive valuations and a unique screening model, VFQY has not delivered higher returns relative to the market.

The Vanguard U.S. Quality Factor ETF is allocated based on specific criteria. The fund is heavily weighted in the consumer discretionary, industrial, and technology sectors.

Vanguard offers factor-based ETFs that have shown outstanding performance compared to unmanaged, index-based comparison ETFs. Factor-based ETFs have now become mainstream investments, with a market share of over 20% globally. Assets under management for factor-based investments have grown significantly, leading many investors to include factor funds in their portfolios.

Vanguard U.S. Quality Factor ETF is an actively managed ETF holding over 300 stocks with relatively strong fundamentals. VFQY is well-diversified across holdings, sectors and size segments. Aggregate metrics look good, with a tilt to value without sacrificing growth.