Vanguard Abandons Ship - ETF Plan B

first posted: 2021-04-20 13:20:36.152243

New Thematic Offering in Line with Focus Group Values

In October 2020, the headline Vanguard abandons ship as the passive investing and ETF giant was abandoning its HMS Vanguard 78 gun ship logo to 'develop a new brand image'.

image credit: wikicommons

As part of of that new image they roll out new thematic feel good ESG and delist evidence based value ETF that had decades research backing them. So maybe they want a less polarising image to ride the ESG wave ?

image credit: www.cartoonbucket.com

Case for Factor Based Investing and Case for ESG

A compelling case for factor investing has been made by the Alpha Architect in these white papers:

Value ETF because research shows you should never buy expensive stocks.
momentum ETF because research shows why one should ride winners and cut losers.
buy separate value factor ETF and momentum because research shows diversification benefits due to negative correlation compared to combining momentum and value screen for stock selection

The goal of value factor and of momentum factor investing is to improve the risk adjusted return of a portfolio based on a measured long term outperformance. In comparison, all long term performance of ESG are disappointing: according to the Global Investment Return Yearbook 2015 p17., tobacco outperformed the market by 5% annualized over 100 years, and the ESG index as measured since 2003 underperform the vice index by 40%.

Nonetheless, investing was also described as a keynesian beauty contest, a game about guessing what stocks will be popular. Much of price action is attributable to multiple expansion over a 10 year span. If that be the case, investing looks like a social game. In comparison to value strategies,

Man creates a representation of the world that fits his purpose, or as Walter Lipmann wrote: To traverse the world men must have maps of the world. Their persistent difficulty is to secure maps on which their own need, or someone else’s need, has not sketched in the coast of Bohemia.

Arguably, the goal of ESG may not be make money but to give investors social proof and make them feel good. Furthermore, if the case for ESG is not performance, the financial industry may see it as a way to acquire price-insensitive clients, which is more a profitable segment than the money-pinchers value-investors.

Best in class Ireland Based Factor ETF - Delisted

Tax benefits depend greatly on one's personal situation. For non-US persons, the benefits of Irish registered ETF are lower dividend withholding and estate tax than most jurisdictions.

In 2015, while smart beta was fashionable, Vanguard announced that it would list international factors ETF for the following factors:

value
momentum
low volatility
low liquidity

The value ETF had positions in several thousand stocks, and was internationally invested. The annual expense ratio was very low for international ETF, and even more when compared to smart beta investment vehicles. The Irish ETF location was ideal to benefit from low dividend withholding rules.

Unfortunately, on 26 February 2021, it proceeded to delist these 4 ETFs. The lackluster macro performance of vval and the outperformance of growth stocks

Best in Class Asia ex Japan Hong Kong based ETF - Delisted

Vanguard was the provider of the lowest cost and highest breadth ETF in Hong Kong: they market the Asia Ex Japan ETF which contains 800 stocks from China, Hong Kong, Korea, Taiwan, Singapore, their China ETF has 400 stocks. This compares with the most liquid Hong Kong tracker ETF which has only 50 stocks and similar A-shares ETF that just track the A50.

Despite having less than 100 stocks, those legacy ETF cost more than double the management fee 0.6%. The market did not pick up those ETF, and their adoption has barely made a dent in the market share of the incumbents.

Unfortunately, Vanguard announced in Summer 2020 that it was exiting the Hong Kong ETF business last year to 'focus' on its Shanghai hub product offering. Later in 2020, surprising many, it announced that it was closing most of its positions in Shanghai office, while proceeding with delisting the ETFs it created.

Now Vanguard just announced that it will delist its Hong Kong ETFs in early May.

In their words: Vanguard has taken the decision to exit its ETF business in Hong Kong in order to enable it to channel its human and financial capital in the region towards initiatives that are more closely aligned with its strategic focus and provide a long-term platform for scalable growth. The business decision follows an extensive review by Vanguard of its international business for alignment with its strategic focus to expand its presence in international markets that offer the ability to directly reach individual investors – or positively impact individual investors through retail intermediaries – combined with access to the required scale and industry dynamics to enable the economic engine behind Vanguard’s unique low cost, end investor-orientated business model.

Alternative Ireland ETF Shortlist: Cheap Broad Coverage with Vanguard Regional ETF

You can check US Vanguard ETFs, but dividends may be subject to 30% wht and in case you are above a certain age, you should know that they are subject to an expensive US estate tax.

The ETF that looks the most like VVAL is iShares IWFV, but it is much more concentrated on large cap, with 5.6% of intel, 3.4% ATT, 2% of Toyota and 1% Hitachi. Alternatively, one could buy country ETFs:

The US stock market is at a historically high level compared to the rest of the world, so I would advise to overweight international ETFs.

To achieve broad coverage (many stocks, passive investment), you can consider the following regional ETF by Vanguard:

VGWE world high dividend yield ETF (for a value tilt), 1579 stocks, 45% US
VFEA : 1800 emerging world, annual charge: 0.22%, 40% China for GARP
VWCG: 601 stocks developed europe, annual charge 0.12%
VJPA Japan 507 stock. Alternative is 2523 T Maxis Topix ex Fin ETF.
VNRA North America 658 stocks, 5% Canada, 95% USA
VHVE: 2199 all developed etf annual charge: 0.12%

Alternative Ireland ETF Shortlist: Factor Investing with iShares more narrow ETF

American and Emerging large cap stock have much better return on equity A viable alternative to broad ETF for factor based investing is the Blackrock/iShares. Which is proposing value factor ETFs (full list of their etf here)

IVWL 399 stocks, world value factor, 0.3%
EMVL 186 stocks, emerging market value factor, 0.4%, Tencent and Baba are considered value.
IWMO 351 stocks, momentum world fund, with massive position in Tesla, Aple, Msft...
IEMO 127 stocks, is a Europe only momentum fund, you get ASM and LVMH and you lose FANG, Adobe, nvidia...

Alternative Hong Kong ETF Shortlist: less choice

The following ETFs are Hong Kong based. With Vanguard exiting, they have much lower coverage and cost more than the VFEA, use only if you are stuck with a HKG broker:

3010 HK iShares Core MSCI Asia ex JP 0.33% expense ratio, 994 holdings
3040 HK: MSCI X Global China 0.18% cost, 14% baba, 12% tencent, 740 holdings
3145 HK BMO Asia High Div ETF 0.45% expense ratio
9846 HK China CSI 300, 0.38% expense ratio
2801 HK China Core MSCI, 0.2% expense ratio, contains 38% of tech

The latter two are about pure China exposure but 2801 and 3010 have a lot in common, you further diversify with Samsung, TSMC, AIA with 3010 ...

On the web this month: Intl Cape by Meb