Combining actively managed funds or ETFs with complementary, diversifying style exposures can help mitigate the frequency and magnitude of these drawdowns at the portfolio level.  This approach may enhance risk-adjusted returns over time and provide a smoother ride that’s easier for investors to stick with.

It’s not as simple as style boxes

But combining active products isn’t as easy as picking a fund from the value, core, and growth style boxes and allocating equally. This is particularly true today, given the highly concentrated U.S. stock market, which has been a headwind for most active managers. 

At Vanguard, we bring nearly 40 years of experience blending complementary active strategies within our multimanager active funds, such as Vanguard Windsor Fund or Vanguard International Growth Fund, where portfolios from leading active managers are combined in one mutual fund.  The portfolio construction exercise we use for these funds mirrors what a financial advisor faces when building a portfolio with active products.   With so many new active ETFs coming to market in recent years, we’re happy to share our latest thinking in active equity portfolio construction.

Building an active portfolio: Key steps

Define your intended risk profile. Combining active managers requires balancing your conviction in each manager with their role in the portfolio and their contribution to the overall portfolio’s intended risk-reward profile.  Do you want to tilt the portfolio towards certain factors that you believe will outperform over time (e.g., value)? Do you want to take more or less risk than the market?  

Know the strategies. It’s essential to understand the investment approaches, style factor biases, and performance patterns of the specific active strategies you are considering. 

Test a variety of allocations. Once you establish those foundations, we suggest you test different allocations to analyze the exposures implicit in the total portfolio and compare that to the portfolio benchmark. This step is important to ensure that unintended risk factors don’t swamp the stock picking skills that presumably drew to you to the managers in the first place. 

An example using Vanguard ETFs

Let’s bring this approach to life with three ETFs that we believe can deliver long-term alpha relative to their style benchmarks and peers:

• Vanguard Wellington U.S. Growth Active ETF (VUSG) offers concentrated high-growth exposure by targeting innovative companies that have the potential to deliver long-term growth regardless of the economic cycle.
• Vanguard Wellington U.S. Value Active ETF (VUSV) offers an opportunistic, contrarian value strategy.
• Vanguard Wellington Dividend Growth Active ETF (VDIG) offers defensive exposure by targeting high-quality companies that can grow their dividends over time

For a portfolio designed to maintain a balanced profile relative to a U.S. core benchmark, our analysis indicates that an allocation f 50% VUSG, 30% VUSV, and 20% VDIG is most effective at maximizing stock-specific risk and minimizing style risk, thus allowing the managers’ stock picking skill to shine through.

This allocation isn’t the ‘call’ on growth that it might seem. Given the concentration of mega-cap tech stocks in the U.S. market (the ‘Mag 7’), an equal-weighted approach would create a structural underweight to this cohort because of the defensive and value-oriented approaches of VDIG and VUSV.  The 50/30/20 portfolio helps avoid a structural underweight to mega-cap growth stocks as a group, while still maintaining notable relative weighting differences within the cohort (driven by the stock-level positions in VUSG).

A style-balanced portfolio lets stock selection drive alpha

Illustrative model allocations

Style factor tilts vs. Russel 1000 Index

 Projected tracking error vs. Russell 1000 Index

_{¹ The illustrative model portfolio is 50% Wellington U.S. Growth Active ETF (VUSG), 30% Wellington U.S. Value Active ETF (VUSV), and 20% Wellinton Dividend Growth Active ETF (VDIG).}

_{Source: Vanguard, using Axioma data, as of September 30, 2025.}

Customizing the portfolio for your goals

Of course, your goals might be different.  For example, if you want a more defensive portfolio, increasing exposure to VDIG could be warranted.  It’s all a question of tradeoffs.  We believe that if you’ve already gravitated to active ETFs as key components in your clients’ portfolios, it’s worthwhile to find a baseline allocation that maximizes stock-selection alpha by minimizing other relative risk factors. From that baseline, you can adjust depending on your convictions and goals.

 

Important information

For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing. 

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All investing is subject to risk, including possible loss of principal.

Vanguard Mexico is not responsible for and does not prepare, edit, or endorse the content, advertising, products, or other materials on or available from any website owned or operated by a third party that may be linked to this email/document via hyperlink.  The fact that Vanguard Mexico has provided a link to a third party's website does not constitute an implicit or explicit endorsement, authorization, sponsorship, or affiliation by Vanguard with respect to such website, its content, its owners, providers, or services.  You shall use any such third-party content at your own risk and Vanguard Mexico is not liable for any loss or damage that you may suffer by using third party websites or any content, advertising, products, or other materials in connection therewith.

The sale of the VUSG, VUSV and/or the VDIG qualifies as a private placement pursuant to section 2 of Uruguayan law 18.627. Vanguard represents and agrees that it has not offered or sold, and will not offer or sell, any VUSG, VUSV and/or the VDIG to the public in Uruguay, except in circumstances which do not constitute a public offering or distribution under Uruguayan laws and regulations. Neither the VUSG, VUSV and/or the VDIG nor issuer are or will be registered with the Superintendency of Financial Services of the Central Bank of Uruguay to be publicly offered in Uruguay.

The VUSG, VUSV and/or the VDIG correspond to investment funds that are not investment funds regulated by Uruguayan law 16,774 dated 27 September 1996, as amended.