Financial services firms frequently develop new investment strategies and bring them to market. The latest financial inventions include alternative indexing, fundamental indexing, and smart beta, to name a few. Many sponsors of funds and ETFs based on these strategies make it sound as if they’ve discovered some kind of new-age investment alchemy—products that produce outperformance with less risk. My colleague Rodney Comegys weighs in on the topic, arguing that much of the recent popularity of smart beta amounts to a triumph of marketing over investment substance.

As Vanguard introduces its Global Minimum Volatility Fund—a fund following a new strategy—we wanted to step back a moment and offer you some plain talk. More specifically, a candid and clear explanation of what our new offering is … and what it is not.

It’s actively managed. Vanguard is and has always been a proponent of low-cost active approaches, as well as indexing. We currently manage $850 billion in active funds—more than one-third of our overall assets under management. This new fund is actively managed and will employ a quantitative process to build a portfolio that seeks lower volatility over time than its benchmark. By contrast, actively managed funds traditionally seek to outperform a comparative market benchmark.

It seeks lower risk, not outperformance. The fund is designed to provide long-term capital appreciation with lower volatility relative to the global equity markets. Our objective is to construct a fully invested, broadly diversified portfolio of U.S. and international stocks that will experience less share-price fluctuation over time than that of the underlying markets in which it invests. In other words, we are trying to deliver broadly diversified exposure to the equity asset class, with lower average volatility over time than the market. We will use quantitative models to assess the expected volatility of stocks and correlation to one another. We will apply constraints in the process, intended to preserve the diversification and liquidity of our holdings. Stocks will be selected from the FTSE Global All Cap Index (USD Hedged), a benchmark that includes about 7,200 stocks of companies in 47 developed and emerging market countries. We expect the fund to hold about 200 securities.

It entails risk. The fund will exhibit share-price volatility and is subject to market risk. It also carries with it the risk of investing in global equities, including country and regional risk. It will possess some level of currency risk and currency hedging risk. There is a risk that our strategy or execution could fail to meet the fund’s objective of delivering lower volatility. The fund is also subject to the risk that all active management involves: There may be times when the fund significantly trails its benchmark in terms of performance and times when it may be ahead.

It’s low-cost. The fund’s Admiral™ and Investor Shares will feature estimated expense ratios of 0.20% and 0.30%, respectively. The expense ratios of comparative funds in the minimum-volatility category range from 0.15% to 1.31% (Strategic Insight data). The arithmetic is simple but bears repeating: The lower your costs, the greater your net return.

 It’s not a market-cap-weighted index fund. Unlike a market-cap-weighted index fund that seeks to match the performance of a market, this new fund may produce returns that deviate from its benchmark and has the potential for wide variations at times. Again, it’s an active fund and is unlikely to exhibit the relative performance predictability of an index fund.

It’s not a wholesale substitute for a market-cap-weighted index fund or for bonds. We expect this fund to appeal to investors who are seeking to lower the overall volatility of the equity portion of their investment portfolios and are willing to accept the risks of using an active-investment approach to do so. We don’t recommend that investors replace their entire equity position with this fund—or to treat it as a substitute for bonds. In short, we view it as a complementary equity holding in investor portfolios.

It’s not a principal-protection fund. You should not expect this fund to protect your principal in times of market downturns. We take a dim view of any stock fund that makes claims of safety from market loss or full downside protection. The objective of the fund is to deliver the least volatility that we can, subject to reasonable constraints on other important aspects of the portfolio. Zero volatility in times of market stress is not a reasonable expectation.

It’s not tax-efficient. We expect turnover for this active fund to be in the range of 50% to 80%, so the fund is likely to generate capital gains. As such, we ask investors to consider holding the fund in a tax-advantaged account, such as an IRA. In general, we believe it is important to hold relatively tax-efficient investments, such as broad-market stock index funds or ETFs, in taxable accounts while keeping tax-inefficient investments, such as actively managed equity and taxable bond funds, in tax-deferred accounts.

At Vanguard, we develop and introduce new products and services only when we believe they provide a valuable, best-in-class way for a significant number of investors to better achieve their financial goals. Our at-cost* structure gives us no incentive to emphasize one type of product in favor of another. We always try to ensure that our clients understand their investments as clearly as possible, so that we have the best match between our clients’ needs and the products and services that we provide to them.

We are extremely excited about the launch of our new Global Minimum Volatility Fund. My hope is this plain talk—along with the specific detail provided in the fund’s prospectus—is helpful as you consider whether this new fund could play a useful role in your portfolio, given your specific needs and circumstances.


* Vanguard provides its services to the Vanguard funds and ETFs at cost.



For more information about Vanguard funds, visit or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest. Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Diversification does not ensure a profit or protect against a loss.

Vanguard Global Minimum Volatility Fund is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund’s foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in those currencies. The fund will incur expenses to hedge its currency exposures.