Vanguard sends up the white flag on struggling factor-based strategy

In a first for The Vanguard Group, the asset management giant is closing a U.S.-listed fund, marking the quiet end to the $44 million Vanguard U.S. Liquidity Factor ETF (VFLQ).

Vanguard declined to comment beyond its Monday morning press release, which said the 4-year-old factor-based fund would be liquidated in late November.

According to the announcement, the decision to close the fund was part of an “ongoing, comprehensive review” of the global product lineup. But market watchers say the writing has been on the wall for Vanguard’s late entry into the factor-based investing space.

Morningstar analyst Ben Johnson pointed out that Vanguard closed the Canadian version of the fund in August 2020 and the European version in February 2021.

“Vanguard was late to the game and had a differentiated offering,” Johnson said. “It’s just an esoteric fund that was difficult to explain to clients, and the performance was crummy.”

The fund gained more than 30% during its first full year in 2019, and followed with gains of 7.7% in 2020 and 23.7% in 2021. But so far this year, the fund is down 22.6%.

With five other factor-based strategies that combine for $3.4 billion, Vanguard still has a solid presence in the factor-based category. But it’s not clear how long the company will stay committed to those funds.

“We continue to add new products that have investment merit and meet investors’ preferences, change advisers and mandates to improve investor outcomes, and eliminate funds that lack a distinct role in investors’ portfolios,” Dan Reyes, head of the Vanguard portfolio review department, said in the statement.

“Despite the [Liquidity] ETF’s capable adviser and sound approach to factor investing, it has not gained scale since its 2018 debut,” Reyes added.

Daniel Wiener, chairman of Adviser Investments, described the factor-based effort as doomed nearly from the start.

“Vanguard launched the factors with high hopes, but assets haven’t exactly been flowing in big,” he said.

Wiener’s colleague, Jeff DeMaso, research director at Adviser Investments, raises questions about Vanguard’s longer-term commitment to factor strategies.

“After less than five years, and just months after the loss of the head of its factor group, Vanguard is liquidating U.S. Liquidity Factor ETF, reducing its factor family to five, from six,” DeMaso said. “Why is Vanguard pulling the plug? I think it comes down to poor performance, a tiny asset base and the aforementioned departure of the founding portfolio manager.”

Antonio Picca, Vanguard's former head of factor-based strategies, left in July.

Nate Geraci, president of The ETF Store, said Vanguard’s struggles to gain traction in the factor-based space can be attributed to being slow out of the gate and offering strategies “that never really seemed to resonate with investors.”

“I think that’s in large part due to branding,” he added. “Investors tend to think of plain-vanilla indexing when they think of Vanguard, not quantitative factor exposure.”