Vanguard to liquidate U.S.-domiciled ETF for first time, spokesman confirms

Vanguard Group on Monday announced plans to liquate one of its factor-based exchange-traded funds, which would mark the first time that the world's second-largest asset manager has liquidated a U.S.-domiciled ETF.

"This is our first US-domiciled ETF liquidation," a Vanguard spokesman said in an email. "Vanguard has liquidated ETFs in our global regions and has taken similar steps with U.S.-domiciled mutual funds in the past."

The $44.2 million Vanguard U.S. Liquidity Factor ETF will be liquidated in late November, Vanguard said in a new release Monday. The decision came as part of Vanguard's ongoing review of its global product lineup, the release said.

"Despite the ETF's capable advisor and sound approach to factor investing, it has not gained scale since its 2018 debut," Dan Reyes, head of Vanguard Portfolio Review Department, said in the release.

Vanguard still believes in the long-term investment case for factor investing, the release said. Vanguard's factor-based products currently include six ETFs and two mutual funds, the spokesman said. Excluding the fund slated for liquidation, the remaining funds currently have assets totaling $3.4 billion.

The asset manager's factor-based fund lineup targets five factors: value, momentum, quality, liquidity and minimum volatility, according to Vanguard's website. The ETFs are actively managed by Vanguard Quantitative Equity Group, which allows for daily portfolio assessment and potential rebalancing "to mitigate factor drift," the release said.

The U.S. Liquidity Factor ETF seeks to provide long-term capital appreciation by investing in U.S. stocks that its adviser determines are relatively less liquid, Vanguard's website says.

The fund "failed to impress investors with its strategy and its performance since inception," said Bryan Armour, director of passive strategies research for North America at Morningstar.

"The liquidity factor hasn't gone mainstream like traditional factors, such as value or size," Mr. Armour said.

The fund was down nearly 23 percent this year through Sept. 23, according to Morningstar data. That exceeded the slightly more than 20 percent decline seen by its mid-cap blend-category peers, according to Morningstar.

Vanguard's suite of factor ETFs is "very different" from its typical offering, Mr. Armour said.

"It's still low-cost, but it takes on a lot of active risk, meaning it deviates from the market in terms of performance," he said. "The whole suite hasn't really gained that much traction."

Shareholders are being notified and can sell their shares prior to the ETF delisting from Cboe BZX Exchange, Inc., which is expected to occur at close of business "on or about" Nov. 22, the release said. On the liquidation date, the remaining ETF assets will be sold, and proceeds will be distributed, it said.

Vanguard Group had $7.1 trillion in total assets under management as of June 30, the spokesman said.