The Vanguard ETF That Acts Like a Hedge Fund Without the Fees
Key Points
Hedge funds typically use an actively managed factor strategy to build a portfolio.
These strategies are typically only available to high-net-worth individuals.
The Vanguard U.S. Multifactor ETF uses a very similar strategy and has performed well.
Most people think of Vanguard as the issuer of ultra-low-cost, plain vanilla index funds and exchange-traded funds (ETFs). They're boring (in the best sense of the word) but have helped millions create long-term wealth through straightforward, cheap broad market exposure.
But over the past few years, Vanguard has increased its presence in the active fund space. In fact, of the 19 ETFs Vanguard has launched in either 2024 or 2025, 10 are actively managed. One of the company's more intriguing launches actually came in 2018, when it debuted its lineup of actively managed factor ETFs.
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Included are individual ETFs focused on the value, quality, momentum, and low volatility factors, but it's the Vanguard U.S. Multifactor ETF (NYSEMKT: VFMF) that takes all of them into account in a single product. It's a strong way to capture a hedge fund-like factor strategy without paying the hedge fund-like fees.
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Key takeaways
- The Vanguard U.S. Multifactor ETF uses a quantitative model to select stocks based on the value, momentum, and quality factors.
- It can include companies of all sizes, making it a true all-cap portfolio.
- The fund's performance has earned it Morningstar's highest 5-star rating.
- Tech is only the 4th largest sector holding. It hasn't relied on the Magnificent Seven stocks to generate its returns.
Breaking down Vanguard's multi-factor strategy
Because the Vanguard U.S. Multifactor ETF is actively managed, its specific strategy is a bit of a mystery. But here's what we do know about how the stock selection process works:
- Volatility: The initial screen removes the top 20% most volatile stocks from within the large-, mid-, and small-cap universes.
- Momentum: Stocks are measured by total returns over the prior six months and 12 months relative to their benchmark.
- Value: The company considers fundamental metrics, such as book value/price, price/earnings, and cash flows/price.
- Quality: The company looks at return on equity (ROE), gross profitability, change in net operating assets, and leverage.
From there, stocks are selected and weighted based on their combined factor scores. Overall, the portfolio aims to maintain a roughly equal weighting between large-, mid-, and small-cap stocks.
It's important to point out that this is a true actively managed fund. Some funds will have large allocations to tech stocks or the Magnificent Seven names specifically. This can give the illusion of active management, but in reality look more like an index fund.
This fund only has a 22% overlap with the Russell 3000 index, ensuring that investors get something different that can pair well with broader index funds.
VFMF vs. U.S. stocks vs. typical hedge fund
The Vanguard U.S. Multifactor ETF doesn't look like the typical U.S. equity index. That's a good thing. Its unique exposure to factors that have the ability to outperform over time gives it an opportunity to enhance overall risk-adjusted returns.
| Metric | VFMF | Total U.S. Market (VTI) | Typical Hedge Fund |
|---|---|---|---|
| Strategy | Active multi-factor | Passive index | Active |
| Expense ratio | 0.18% | 0.03% | Typically 1%-2% annually performance fee |
| Factor exposure | Value, momentum, quality, low volatility | None | Varies |
| Holdings | ~600 stocks | ~3,500 stocks | Varies, but usually concentrated |
| Volatility screen | Yes | No | Varies |
| Dividend yield | 1.5% | 1.1% | Varies |
| Typical use case | Factor alpha capture | Broad market exposure | Alpha capture for high-net-worth investors |
Assuming that you're not the typical high-net-worth client that has direct access to the traditional hedge fund strategies, the Vanguard U.S. Multifactor ETF might be the closest and best option you'll find. If you're an investor looking to augment your core equity exposure with a fund that...
- Provides exposure to the value, momentum, and quality factors
- Is actively managed to take advantage of multiple market cycles
- Eliminates exposure to the market's most volatile stocks
- Costs a fraction of what a typical hedge fund strategy would charge
...then I think this ETF is worth strong consideration. With just $535 million in assets under management, it's a little-known gem within Vanguard's lineup.
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David Dierking 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.
