Vanguard U.S. Momentum Factor ETF ETF Shares VFMO

Vanguard US Momentum Factor ETF reliably delivers exposure to the momentum factor, which should generate a durable performance edge.

Vanguard's quantitative equity group manages this rules-based exchange-traded fund. The process sweeps in high-momentum stocks from the large-, mid-, and small-cap markets and weights them by the strength of their momentum. That step amplifies the ETF's exposure to high momentum stocks, or those that have performed well in the recent past.

The approach has worked so far. The fund’s returns have been closely correlated with the momentum factor. It tends to perform well when the market is stable and yesterday's top-performing stocks continue their upward trajectory. However, that persistence breaks down during volatile periods, and performance suffers as a result. Investors should expect some ups and downs with this ETF, but it should pay off in the long run.

The consistency of this fund’s momentum tilt stands out. Momentum can shift on a dime and require significant portfolio turnover to stay on top of it. Vanguard’s managers trade whenever its momentum exposure slips. That gives it an advantage over rigid index funds that can only reshuffle their holdings at prescribed rebalancing dates. Constant turnover invites trading costs that weigh on total returns. The ETF combats that by only holding stocks that are easy to trade, and Vanguard’s trading infrastructure keeps those expenses in check.

The breadth of this portfolio and small position sizes limit the impact of stock-specific risks. Pulling stocks from the broader market breeds a portfolio ranging from 500 to 750 holdings. Its top 10 names rarely account for more than 15% of its assets. That ensures that the momentum factor drives returns—not individual company bets.

This ETF looks quite different from the broad market and Morningstar Mid Index, its Morningstar Category benchmark. Pronounced momentum exposure requires differentiation, but that can increase risk. So far, those differences have been rewarded, but investors should exercise patience to reap those benefits.

This strategy earns an Above Average Process Pillar for reliably capturing a time-tested factor while avoiding undue risks along the way.

Vanguard starts by screening the Russell 3000 for stocks that fail to meet the basic liquidity requirements. It also filters out utilities for their limited upside and REITs because it believes factor investing doesn’t work in the real estate sector. The team splits the remaining stocks into large-, mid-, and small-cap buckets and ranks them based on their momentum characteristics. Trailing six-month, 12-month, and risk-adjusted 12-month returns equally factor into the momentum score.

Vanguard selects the highest-ranked stocks from each segment until one third of each bucket’s market cap is selected. It combines them into one pool and weights them by their composite momentum score, an approach that can favor smaller stocks and stuff more popular names toward the bottom of the portfolio. Targeting mid- and small-cap stocks and disconnecting size from weight make this portfolio look quite different from its parent index and most other momentum funds. But it dials up exposure to the momentum factor and yields a broadly diversified range of holdings, a worthy trade-off for patient investors.

Momentum is a fleeting factor that pulls this portfolio all over the map. The best recent performers constantly change and force this fund to do the same. For instance, red-hot technology returns prompted the fund to grow its tech stake from 9% to 32% in 2023. Energy stocks, on the other hand, slid from 20% to just 5% of the portfolio over the same time frame because of their shaky performance. This portfolio can look very different from one quarter to another, but that’s a feature—not a bug.

This ETF can bounce around the Morningstar Style Box as it pursues the best-performing stocks. It currently resides in the mid-cap blend category, but it has spent time in the mid-cap growth segment. The fund tends to sport a slightly smaller market-cap orientation, too. Divorcing market cap and weight shrinks the average holding size, even though the fund is one-third large caps.

Investors shouldn’t expect this fund to look or perform like the crowd. Selecting and weighting stocks by their momentum traits dials up the fund’s exposure to the factor and breeds a unique portfolio. But it manages to balance its bold momentum bet with a well-diversified portfolio: It reliably exceeds 500 holdings and stashes less than 15% of its assets in its 10 largest holdings. Avoiding firm-specific bets ensures that momentum is the main engine of performance.

Vanguard’s Quantitative Equity Group has the research chops to evolve this strategy and the resources and experience to efficiently implement it, meriting a People Pillar rating of Above Average.

Scott Rodemer leads a five-person team tasked with executing and fine-tuning this systematic strategy. The team’s coding skills help it implement the strategy in a cost-efficient manner, while their investment expertise aids the research process.

Managers divide their time between portfolio management and research, fostering a practical understanding of market dynamics. It’s a fairly lean team that benefits from Vanguard's comprehensive support in capital markets, technology, and trading, allowing for a focused yet well-supported operation.

The team constantly monitors its portfolios’ factor exposures. It rebalances them when they start to decay, and trading costs are reasonable. Vanguard's practice of rotating portfolio managers through the group cultivates broad expertise and adaptability within the team.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

This ETF has captured the momentum factor’s payoff. It eked out a modest 11-basis-point annualized advantage over its parent universe, the Russell 3000 Index, from its February 2018 inception through the end of September 2025. The ETF also handily beat its category index, the Morningstar US Mid, by 3.2 percentage points annualized over the same stretch.

Momentum investing works best during stable periods of consistent stock market leadership. In other words, the fund should stack up well when leading stocks and sectors stay in the lead and weak performers continue to waver. For instance, the energy sector held up far better than the rest during the 2022 bear market. The fund consequently held an energy stake between 12 and 16 percentage points larger than the category index during the year. Energy sustained its relatively strong returns all year, helping the fund hold up 13 percentage points better than the category index and rank among the top 5% of its peers.

Market reversals can leave the fund flat-footed. Its energy-laden portfolio went from boon to burden when the pendulum swung back toward growth stocks in early 2023. The fund trailed the category index by 4.5 percentage points on the year and finished in the bottom quintile of mid-growth peers.

Vanguard US Momentum Factor ETF's Prospectus Adjusted Expense Ratio is 0.13% per year. It places it in the cheapest quintile of the Morningstar US Fund Mid-Cap Blend Category, where the median fee is 0.83% per year. This cost positioning translates into a Medalist Rating Price Score of 2.09, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.