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The 5-Star Vanguard ETF That You Probably Don't Know Even Exists
VFMF's multi-factor actively-managed approach is a unicorn for Vanguard, but it's worked.
David Dierking
February 13, 2025 • Estimated Reading Time: 10 minutes
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With nearly 100 ETFs accounting for more than $3 trillion in assets, you'd assume that most investors have a good grasp on the issuer's fund lineup. After all, most of them have more than $10 billion in assets and all but a dozen or so have at least $1 billion, a number which would make the fund an unquestioned success in many issuer's lineup.
But there are still a few that slip under the radar. Most well known for the Vanguard S&P 500 ETF (VOO), the Vanguard Total Market ETF (VTI), the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (VYM), Vanguard's roster is pretty diverse using its famous ultra-low cost theme. On the "smaller end of the scale, you'll find a lot of the company's sector ETFs and some "off brand" factor and style funds, such as the Vanguard Mega Cap Value ETF (MGV) and the Vanguard Russell 1000 ETF (VONE).
Search a little further down the list and you'll find a suite of funds that is 7 years old, most of the funds within it have less than $1 billion in assets and originally included the first and only ETF that Vanguard has ever closed. That would be its group of factor ETFs.
Vanguard Factor ETFs: An Introduction
The factor ETF suite was perhaps Vanguard's first real attempt at expanding on its traditional brand of low cost index funds. The low expense ratio would still exist on these funds, as it always does, but these ETFs would be actively managed. This would be a first for Vanguard.
The lineup includes:
Note: VFLQ was the ETF that closed back in 2022 with just $44 million in assets at the time. The liquidity factor is perhaps the least used and least understood factor, so it makes sense that Vanguard cut bait on it.
The strategies used by each of the funds is fairly standard and nothing really groundbreaking. The differentiator is that instead of a rules-based mandate that identifies stocks using certain criteria and a particular weighting strategy, Vanguard uses screens to narrow down the potential universe of stocks before selecting the final components and weighting them according to a proprietary methodology.
Interestingly enough, even though these ETFs remain well under the radar, most of them have been pretty successful against their designated benchmarks. One of them, in my opinion, stands out.
Vanguard Multifactor ETF: A 5-Star Success Story
VFMF obviously considers all of the major factors - value, momentum, quality and low volatility - into a single strategy, looking for stocks with the best combination of these factors. It's unique because it invests in stocks of all market caps, not just large-caps, and weights them based on a combination factor score.
In this way, VFMF doesn't discriminate by the size of the company, either within the strategy or the weighting method. That doesn't necessarily play out as well in a market, such as the one we're in, that's been dominated by large-caps. Within its peer group, it's been a different story.
Morningstar places VFMF within its mid-cap value category, which the fund squarely falls into based on its overall composition. The portfolio trades at about 13 times earnings and less than two times its book value. Not that this has any kind of dividend focus, but the current 1.5% yield does offer a slight premium above the S&P 500's 1.1%.
VFMF would make a great complement to the S&P 500 based alone on where it falls in the style box, but it would also offer a significant deviation from the index's sector allocation as well.
Most of the difference comes from the financials and the tech sector. The latter has less than a 10% allocation in VFMF, while the former has a comparatively huge 32% allocation. With industrials and energy also getting meaningful overweights, it's important to point out that this fund has a heavy cyclical influence, making it much more economically sensitive than you might find in other mid-cap products.
This is largely a function of the fund's value tilt, but there's also some extra influence on display from the quality factor as well.
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Vanguard Multifactor ETF: Strong Performance Record
Given the market's preference for large- and mega-cap tech over the past few years, it's not surprising that VFMF trails the S&P 500 by a wide margin. Against its peer group, however, it holds up quite well.
VFMF beats both of Vanguard's comparable funds, the Vanguard Mid Cap Value ETF (VOE) and the Vanguard S&P Mid Cap 400 Value ETF (IVOV), since its inception. Within its Morningstar category, VFMF has landed in the top 25% performance-wise in each of the past four years and is sitting in the top 8% in 2025 so far. Its 5-year average annual return of 12.7% beats the mid-cap value group average of 9.4%, landing it in the top 12% of the category.
On a risk-adjusted basis, VFMF looks even better.
VFMF's worst performance came in its first two years, which is why we see its earliest calculable 5-year Sharpe ratio only matching its mid-cap value peers. Since then, VFMF hasn't just outperformed on an absolute basis, it's crushed it on a risk-adjusted basis.
Vanguard may not be known as an active manager, but VFMF has demonstrated over its life that the company does have some aptitude for it.
Final Thoughts
VFMF's performance record and 5-star Morningstar rating have proven that it's generated strong returns for shareholders. Its the strategy, however, that I believe makes it a great fit for a lot of investors.
Multi-factor strategies can do a good job of narrowing down a broad universe of stocks to a group whose characteristics tend to favor long-term outperformance. There are some risks though. The value and low volatility screens, of course, would have probably eliminated most of the magnificent 7 names from consideration, the group that has performed far better than others in recent years. It won't fall in the market's sweet spot all the time, but it does tend to tilt favorably for the long-term.
VFMF may be largely unknown within the Vanguard lineup, but there's enough here to make it well worth consideration.
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