Vanguard U.S. Multifactor ETF (VFMF): A Misunderstood Gem in a Sea of Underperformance

Let me tell you, folks—when it comes to ETFs, sometimes the market's short-term myopia misses the big picture. Take the Vanguard U.S. Multifactor ETF (VFMF). Critics are quick to label it an “underperformer” compared to the Russell 3000 Index, but here's the deal: They're judging a sprinter in a marathon. VFMF isn't just another broad-market tracker—it's a factor-driven machine built for long-term alpha. Let's dissect why this misunderstood fund is a must-have core holding, and why its recent underperformance is a buying opportunity.

The “Underperformance” Myth: A Flawed Benchmark, Not a Flawed Fund

First, let's tackle the elephant in the room. Yes, VFMF has lagged the Russell 3000 Index in recent years. But here's the kicker: They're not competing for the same medals! The Russell 3000 (tracked by VTI) is a passive, “buy everything” index. VFMF? It's an active, factor-based strategy that hunts for stocks with strong value, quality, and price momentum—and it tilts toward smaller and mid-cap names.

The Russell 3000's broad exposure has thrived in this era of large-cap dominance, where giants like Apple and Microsoft have dragged the index upward. But here's the rub: Factor-based strategies like VFMF shine when smaller caps and value stocks rebound—and they will rebound. Factor cycles are as predictable as the seasons. When growth stocks hit a wall, VFMF's focus on quality and value becomes its armor.

The Cost Efficiency Edge: 0.18% Isn't Just a Number

Critics love to harp on VFMF's 0.18% expense ratio compared to VTI's 0.03%. Cue the eye-roll. Yes, VFMF costs more—but that's because it's actively managed. Vanguard isn't just copying an index; it's deploying a size-diversified factor tilt that requires real-time rebalancing. And here's the kicker: VFMF's expense ratio is still among the cheapest in its category, per Morningstar.

Over five years, VFMF has delivered 11.93% annualized returns, crushing its category and segment averages (4.15% and 2.17%, respectively). Meanwhile, the Russell 3000's 13.07% 5-year return isn't just about broad-market exposure—it's a reflection of a specific cycle favoring large caps. When the cycle turns, VFMF's factor-driven focus could blow the Russell out of the water.

The Real Advantage: Flexibility Beyond Indexes

VFMF's non-index-tracking flexibility is its secret weapon. Unlike passive funds tied to Russell's rigid membership rules, VFMF can avoid overexposure to overvalued stocks and focus on companies with strong fundamentals. Its portfolio holds just ~464 stocks, far fewer than the Russell's ~3,000. That concentration creates volatility, sure—but it also means VFMF can pivot faster to opportunities in smaller-cap segments.

Take a look at its top holdings: 11.12% in the top 10, versus 32.54% for its category. That's less reliance on megacaps, which means less drag when they falter. And with the June 2025 Russell reconstitution shaking up its constituents (adding 130 stocks and dropping 100), VFMF's active approach can adapt without waiting for annual rebalances.

The Bottom Line: A Long Game Built to Win

Here's the math: VFMF isn't a “get rich quick” play. It's a risk-adjusted powerhouse designed to outperform over decades, not quarters. Its 5-year Sharpe ratio (0.93) edges out the Russell's 0.87, and its beta of 1.04 means it'll swing with the market—but with smarter stock picks.

Right now, VFMF is in a valuation sweet spot. Smaller caps are cheap, and factors like value and momentum are primed for a comeback. The fund's expense ratio may be a hair higher than VTI's, but its Morningstar Gold Medalist rating and track record of beating peers make it a steal.

Action Plan:
- Hold for the long haul: VFMF is a core holding, not a trade.
- Dollar-cost average: Use dips to build a position—volatility is part of the process.
- Avoid benchmark fixation: Compare it to factor peers, not passive indexes.

Final Word: Don't Let the Noise Distract You

The critics will keep yelling “underperformer,” but here's the truth: VFMF is a factor fund built for cycles, and the current environment is just a speed bump. When smaller caps roar back—and they will—this fund will be ready to lead.

VFMF isn't a gem that's misunderstood—it's one that's undervalued. Get in now.