Vanguard Begins Updating Its Investing Philosophy

As if it hasn’t done enough this year, Vanguard Inc. is shaking up the world of factor investing and smart beta by introducing six new exchange-traded funds and one mutual fund that rely on those strategies. This represents a major expansion of the offerings by the fund company that all but invented low-cost passive index investing.

Before going further, two quick definitions are called for. First, factor-based investing involves assembling portfolios based on specific quantifiable characteristics such as valuation, capitalization size, earnings quality, momentum and so on. Academic research suggests these attributes can potentially generate above-market returns. Second, smart beta is a way to assemble an index by means other than the traditional weighting by market capitalization, again with the goal of outperforming the market As we have previously discussed, it has attracted lots of capital, even as some have dismissed it as a mere marketing gimmick.