News

Vanguard has long been synonymous with passive investing, pioneering low-cost index funds that have helped millions build wealth over time. While index investing remains a cornerstone strategy, some investors seek opportunities to potentially outperform the broader market through actively managed funds.

The Vanguard U.S. Momentum Factor ETF Shares (NYSEMKT: VFMO) stands out as an intriguing option for those looking to add momentum exposure to their portfolios. Let's explore how this actively managed exchange-traded fund (ETF) could enhance your investment strategy through its distinctive approach.

A strategic mid-cap advantage

The fund's portfolio architecture reflects a calculated strategy for capturing market momentum. Its median market capitalization of $14.2 billion stands markedly below the $188.7 billion of its benchmark, the Russell 3000, positioning investors to capitalize on companies in their dynamic growth phase.

This deliberate mid-cap emphasis may provide distinct benefits compared to conventional large-cap focused funds. These companies typically offer greater growth potential while maintaining sufficient market presence and financial foundation to weather market cycles.

Value-conscious momentum investing

With a price-to-earnings ratio (P/E) of 21.5, the fund trades at a compelling discount to its benchmark's 26.3 multiple, reflecting more attractive valuations throughout its portfolio.

What's particularly noteworthy is that it maintains this valuation edge while keeping pace with its benchmark's impressive 17.8% annualized five-year earnings growth rate across its holdings.

This skillful balance between growth prospects and valuation discipline underscores the fund's sophisticated approach to building shareholder value. The strategy enables investors to capture momentum while remaining anchored to fundamental value principles.

Cost-effective active management

At just 0.13%, Vanguard U.S. Momentum Factor ETF Shares' expense ratio rivals that of many passive index funds, allowing investors to retain more of their returns while getting professional active management. This fee structure stands in stark contrast to the category average of 1.07% -- a difference that compounds meaningfully over time.

However, the fund's active strategy is reflected in its substantial 73.4% turnover rate, which far exceeds that of typical passive index funds. This elevated trading activity may trigger significant taxable events, suggesting the fund might be best positioned within tax-advantaged accounts such as IRAs to help shield investors from these implications.

Broad diversification meets focused strategy

Encompassing 611 holdings, this actively managed Vanguard fund delivers comprehensive diversification across the U.S. market. The fund maintains its domestic focus with just 0.5% allocated to foreign securities, concentrating on U.S. opportunities.

This thoughtful portfolio construction balances broad market exposure with momentum-driven selection. Such disciplined diversification may help mitigate volatility while positioning the fund to capitalize on strong market conditions.

A compelling addition to long-term portfolios

Since its 2018 launch, this Vanguard offering has showcased the potential of cost-efficient management to harness market momentum factors while delivering meaningful returns to investors. The fund occupies a strategic middle ground between conventional index tracking and premium-priced active management, carving out its niche in the investment ecosystem.

However, despite its innovative approach, this actively managed Vanguard ETF has modestly underperformed the S&P 500 since its inception:

For investors looking to diversify beyond traditional index funds, this Vanguard fund provides momentum exposure through a distinctive cost framework pairing Vanguard's characteristically low expense ratio with the potential for higher tax consequences stemming from its active trading approach.

The Vanguard U.S. Momentum Factor ETF Shares could thus play a valuable role within a thoughtfully constructed growth portfolio housed in a tax-advantaged account.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $20,991!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,618!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $406,922!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 21, 2024

George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.