Vanguard's Future Might Be In Active, Not Passive, ETFs

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It would be stating the obvious to say that Vanguard has built its fund empire on the back of ultra-cheap passively-managed index ETFs. It manages more than $3.2 trillion of ETF assets alone and is likely to imminently pass BlackRock as the largest ETF manager in the world.

That doesn’t mean, however, that Vanguard can’t learn a few new tricks.

While the dominant performance of the S&P 500 and the Nasdaq 100 during 2023-2024 didn’t exactly encourage diversification, the recognition that active management has its place as an opportunity to create portfolio alpha has reemerged. Some of the best product innovation is happening on the active side and we’ve seen a boom in these types of strategies coming to market.

Even at Vanguard!

In fact, of the company’s last dozen ETF launches, seven have been actively-managed.

There’s been some interesting stuff in there too.

I’m a fan of both the Vanguard Core Bond ETF (VCRB) and the Vanguard Core Plus Bond ETF (VPLS). VCRB sticks mostly with the investment-grade bond market, but is much less focused on U.S. Treasuries. It has a decent-sized allocation to foreign government bonds and also has a higher allocation to corporate bonds. VPLS takes it one step further and allows added exposure to emerging markets and high yield bonds.

Those differences mean that VCRB and VPLS can be legitimate alternatives to Vanguard’s biggest bond ETF, the Vanguard Total Bond Market ETF (BND). VCRB’s expense ratio of just 0.10% means that you’re paying very little extra in order to get the active management benefit. VPLS charges a slightly higher 0.20% annually, but that makes sense given the challenges of investing in the EM and junk bond markets.

The latest launch, the Vanguard Multi-Sector Income Bond ETF (VGMS) moves even further away from Vanguard’s traditional product suite. There’s little holding information on the fund given how new it is, but if we look at the Vanguard Multi-Sector Income Fund (VMSIX) as a pseudo-proxy, we see that it has nearly half of the fund’s assets are in junk bonds with a sizable allocation going to international bonds. Vanguard has never had a pure junk bond ETF in its lineup, but VGMS might be as close as it gets.

This is essentially Vanguard doing very un-Vanguard-ian things in order to expand its product lineup. That includes investing in markets it typically hasn’t focused on in the past and using strategies typically reserved for the “other guys”.

To be fair, Vanguard’s active ETF lineup hasn’t been an unmitigated success. Of its 13 active ETFs, only three have more than $1 billion in assets - VCRB, the Vanguard Ultra-Short Bond ETF (VUSB) and the Vanguard U.S. Momentum Factor ETF (VFMO). Vanguard’s U.S. Liquidity Factor ETF was actually the first ETF that the company has ever shuttered due to a lack of AUM growth.

I think the important thing to judge these funds on, however, is their strategy. VCRB, VPLS, VUSB and VGMS all offer something unique to bond investors and do so with comparatively razor-thin expense ratios.

For all of the superlatives we can throw at Vanguard, they haven’t been able to offer a “complete” portfolio. They don’t have a commodities ETF. They don’t have a bitcoin ETF. Up until recently, they didn’t have a bond ETF that offered meaningful exposure to junk bonds.

These new active bond ETFs help solve some of those problems. And it’s good to see issuers recognize the shifts happening within the marketplace and be willing to adapt with them.