Image Source: Pixabay

Vanguard Group, a pioneer in passively managed index funds, is dipping its toe into active management with the pending launch of three new actively managed ETFs.

While the firm has several actively managed fixed income ETFs, these three new funds would be its first actively managed stock ETFs. It does have actively managed mutual funds and institutional separate accounts run by partners like Wellington Management.

Actively managed means the portfolio is managed by a team of portfolio managers who pick the stocks that go into the ETF.

Vanguard built its name as a pioneer in passively managed indexing, where its funds would track to an index investing in all or most of the stocks on the index it tracks. No management is required, thus the fees, or expense ratios, are nearly nothing.

Passive consistently beats active

Over the past 15 years, in particular, the indexes, like the S&P 500, for example, have performed extremely well and most actively managed funds have underperformed their indexes or benchmarks.

The outperformance becomes greater the longer the time horizon. According to the S&P Dow Jones Indices Versus Active (SPIVA) Scorecard, some 92% of actively managed large-cap mutual funds underperformed the S&P 500 over the past 15 years.

Actively managed funds tend to perform best when markets are down. Over the past 25 years, the only years that active funds have beaten the S&P 500 is 2005, 2007, and 2009 – two of those years were during the Global Financial Crisis. They came close in the 2022 bear market, with only 51% of actives underperforming their benchmark, according to the Visual Capitalist.

Active ETFs are hot right now

Actively managed ETFs are a relatively new phenomenon, with most being introduced in the last five or six years since an SEC ruling in 2019 that made them easier to roll out without having to report their holdings daily.

With the volatility we saw in the first half of the year, investors were flocking to actively managed ETFs. In the first half of the year, there was $127 billion in net inflows into U.S. actively managed equity funds compared to $191 billion in passive ETFs, according to TD Securities. That’s about 39% of inflows – and a record amount for the first six months.

In July, according to Morningstar, active ETFs brought in a record $44.8 billion in inflows. And in May, the total number of active ETFs surpassed the number of passive ETFs. In fact, a recent analysis found that some 84% of all new ETFs launched in the past year were actively managed.

So clearly, despite the performance track record, there is growing demand for active equity ETFs among investors, which is likely why Vanguard is now getting in on it.

Vanguard’s new active ETFs

The three new Vanguard equity ETFs will be managed by Wellington, which has run many of Vanguard’s active mutual funds. According to SEC filings on August 18, they are:

• Vanguard Wellington U.S. Value Active ETF (VUSV), a large-cap value fund managed by David Palmer;
• Vanguard Wellington U.S. Growth Active ETF (VUSG), a large-cap growth fund managed by Brian Barbetta and Michael Masdea; and
• Vanguard Wellington Dividend Growth Active ETF (VDIG), a large-cap blend fund managed by Peter Fisher.

All three of these new offerings are based on similar mutual funds that Wellington already runs for Vanguard. While not in the preliminary SEC filings, the expense ratios for these funds were listed in an analysis by Morningstar. The value fund has an expense ratio of 0.30%, while the growth fund is at 0.35% and the blend fund expense ratio of 0.40%.

These are much higher than the expense ratios for Vanguard’s which are miniscule, some as low as 0.03%. But they are cheap compared to their competition. According to Morningstar, the value and growth fund fees are in the bottom decile, while the blend fund fees are in the bottom third.

Vanguard has been the fastest growing ETF manager in recent years, and these new funds are likely efforts to take advantage of that growth, as well as the rising demand for active ETFs.

More By This Author:

Did Q2 Earnings Exceed Expectations Or Get Derailed By Tariffs?
Spotlight On Fed: What Powell, Bowman, And Waller Will Say About Rates
Big Box Week: Is It a Good Summer For Walmart, Target, Home Depot, And Lowe’s?