Vanguard vs. DFA vs. American Funds vs. other similar fund families.

Edit to add: Changing the name of this thread to include American Funds also since it is somewhat similar to DFA in that it is an alternative to Vanguard that has some evidence of occasional outperformance but with higher fees than Vanguard or even DFA (although still the fees are lower than the average sucky active mutual fund).

Anyone have experience with DFA funds or their advisers? Here is some info:

Some old past historical performance is available on this archived thread: http://www.fatwallet.com/forums/finance/667660

Any updates to this info or others with experience with DFA Funds or DFA Advisers?

See: http://www.retireearlyhomepage.com/low_fee_dfa.html

edit to add: Saying "past returns is no indication of future earnings" is not a useful addition to the discussion. If you don't know anything about DFA, move along.

Commentary on these ideas would be useful:

http://meridianwealth.com/Documents/DFA%20WSJ.pdf

and: http://www.evansonasset.com/index.cfm?Page=20

Past performance does not guarantee future results.

Vanguard waives the $10 fee if you sign up for electronic statements.

DFA uses active management in many of their proprietary funds. The fund managers pick stuff. Your advisor would then actively pick the DFA funds for you. Now you have two assholes actively managing and both have to be right to beat the market.

Best bet is Vanguard with self management based on an asset allocation figured out from Bogleheads forum.

jviken said: They also do not have a Peru ETF.

I am waiting for a triple-leveraged-emerging-Peru-small-cap-value-REIT-unhedged-bond fund.

zmre2b9 said:

Buying stocks for the funds is a detailed process but can be described in general terms. We create an eligible universe of all traded stocks of real operating companies. We then apply filters to exclude stocks that do not fit the asset class of the fund or that have specific pricing or trading concerns. The remaining stocks are eligible for purchase and are subject to rough market-capitalization target weights. We regularly monitor trading in the market place with real-time checks for current news that may impact prices, such as a looming takeover. Other than that, we're generally indifferent among the stocks in the eligible universe, which allows us to trade opportunistically and take advantage of liquidity premiums that benefit client returns. For additional information regarding the investment strategies of each fund, please read each fund's prospectus and statement of additional information carefully.

"Dimensional's value strategies are based on the Fama/French research and are designed to capture the return premiums associated with high book-to-market (BtM) ratios. Our value portfolios are constructed by first ranking the total market universe by market cap and identifying those companies that fall within the defined size range. This universe is then ranked by BtM ratio.

This is an active strategy. They actively design the criteria for their proprietary index and then "passively" let the index they created work. It's a way of getting people who like active management and people who prefer passive management to both want to buy into DFA.

Here is an example:

Lets say that I was running a lemonade stand and I picked the lemons off my tree. Some people prefer lemonade with lemons that are hand picked because the picker can select the best lemons. However some people prefer a passive selection of lemons that is more indicative of the overall lemon quality. The active lemon picker may sometimes be wrong. The passive lemon picker will always have an aggregate average lemon quality.

Suppose I said that my lemonade is made by a passively selected group of lemons. But first I sorted out all the lemons that were greater than 2 inches in diameter and all the lemons that are two shades of yellow off. But then from that group I just randomly and passively use all those lemons. This really isnt a true passive strategy. I determined the lemons entering my "passive" pool.

Thus as you can see, DFA is not truely passive. Passive means Total Stock Market index with market cap weighting. It does not mean hand select certain areas of TSM with arbitrary weightings and then "passively" invest in that. DFA are great funds and have great results so far.

tripleB said: This is an active strategy. They actively design the criteria for their proprietary index and then "passively" let the index they created work. It's a way of getting people who like active management and people who prefer passive management to both want to buy into DFA.
You're talking out of your ass again tripleB. DFA has absolutely no desire for anyone who wants active management. If you even say that you want to actively manage your own portfolio of DFA funds, their specially indoctrinated advisors are likely to refuse your business entirely.

If you really want to know what they do, go read up on Farma-French factor loadings and you'll understand why their strategies aren't active - they're just passive relative to something different than a straight market-cap weighted index.

fattysaver said: Link from BogleHeads.org
I know some "DFA-affiliated advisors" use active funds. PCRIX, Pimco Commodity Real Return Fund is often suggested by at least one highly regarded "DFA Affiliated advisor".

Personally, I don't need hand-holding from an "advisor" when it comes to investing.
Read a few books by John Bogle, get advice from the BogleHeads forum, invest with Vanguard, and that's it!

Except for the fact that when you look at risk numbers for almost all of the boglehead's member's portfolios the risk numbers are not commensurate with the returns. Regardless of whether or not you agree with DFA or Vanguard, DFA portfolios (IFA 05 through IFA100) simply show that a well designed portfolio will beat an average one almost every time regardless of the funds when adjusting for risk.

Personally, I would love to see your portfolio and see what your risk return numbers are compared to the risk return of the DFA portfolios. I would be willing to bet they are not even close to as good since 90% of the portfolios I see here and on bogleheads are not.

For savvy investors like most of us here in FW, there is absolutely no need to go through an advisor to gain access to a fund. If DFA mandates this, I'd look elsewhere. Essentially what you are doing is adding another layer of fees on top of the fees the fund already charges, low as they may be. An advisor for the most part will simply listen to the types of funds/ETFs, etc. you like, those you're comfortable with, proceed to look for them, then pitch them to you. If you're interested, great. They collect their advisor fee and everyone's happy. If not, they look for something else.

The timeless, conventional wisdom is that 80% of active money managers fail to beat the indexes consistently over time. Well then the short answer is to find the 20% that do. Good, fundamental bottom-up value oriented stock picking at reasonable fees (1% or less) is the way I've been going for many years and I'm happy with the results.

mikef07 said: RedCobra said: For savvy investors like most of us here in FW, there is absolutely no need to go through an advisor to gain access to a fund. If DFA mandates this, I'd look elsewhere. Essentially what you are doing is adding another layer of fees on top of the fees the fund already charges, low as they may be. An advisor for the most part will simply listen to the types of funds/ETFs, etc. you like, those you're comfortable with, proceed to look for them, then pitch them to you. If you're interested, great. They collect their advisor fee and everyone's happy. If not, they look for something else.

The timeless, conventional wisdom is that 80% of active money managers fail to beat the indexes consistently over time. Well then the short answer is to find the 20% that do. Good, fundamental bottom-up value oriented stock picking at reasonable fees (1% or less) is the way I've been going for many years and I'm happy with the results.


I laugh at this. Savvy investors? Not likely. Show me your portfolio that has not only come close to the DFA portfolios, but done so with similar or less risk. This is the problem with the savvy investors here. They don't even know how to look at risk adjusted returns, let alone understand them.

I consider savvy investors who can exceed the DFA returns with lower risk, not ones who can't.

No. You're quite right. I've never heard of risk-adjusted returns. Never heard of alpha, beta, r-squared, sharpe ratios, asset allocation, or discounted cash flow analysis either. I'll make sure to give my posts more thought next time.

When I pay fees, I expect those fees to be earned through good old fashioned stock picking, not passive quantitative strategies requiring little in the way of manpower.

And I laugh too, all the way to the bank.

RedCobra said:
No. You're quite right. I've never heard of risk-adjusted returns. Never heard of alpha, beta, r-squared, sharpe ratios, asset allocation, or discounted cash flow analysis either. I'll make sure to give my posts more thought next time.

Maybe you should google them then, eh?

RedCobra said: mikef07 said: RedCobra said: For savvy investors like most of us here in FW, there is absolutely no need to go through an advisor to gain access to a fund. If DFA mandates this, I'd look elsewhere. Essentially what you are doing is adding another layer of fees on top of the fees the fund already charges, low as they may be. An advisor for the most part will simply listen to the types of funds/ETFs, etc. you like, those you're comfortable with, proceed to look for them, then pitch them to you. If you're interested, great. They collect their advisor fee and everyone's happy. If not, they look for something else.

The timeless, conventional wisdom is that 80% of active money managers fail to beat the indexes consistently over time. Well then the short answer is to find the 20% that do. Good, fundamental bottom-up value oriented stock picking at reasonable fees (1% or less) is the way I've been going for many years and I'm happy with the results.


I laugh at this. Savvy investors? Not likely. Show me your portfolio that has not only come close to the DFA portfolios, but done so with similar or less risk. This is the problem with the savvy investors here. They don't even know how to look at risk adjusted returns, let alone understand them.

I consider savvy investors who can exceed the DFA returns with lower risk, not ones who can't.

No. You're quite right. I've never heard of risk-adjusted returns. Never heard of alpha, beta, r-squared, sharpe ratios, asset allocation, or discounted cash flow analysis either. I'll make sure to give my posts more thought next time.

When I pay fees, I expect those fees to be earned through good old fashioned stock picking, not passive quantitative strategies requiring little in the way of manpower.

And I laugh too, all the way to the bank.

SImply put until one knows your portfolio and what it has done this is all white noise. You already stated that most here are savvy investors which is laughable. I have seen people's portfolios here and 99% of them have underformed mine long term on a risk adjusted basis and believe me I am no expert on putting together portfolios. Like I said above I highly doubt your portfolio has outperformed the DFA portfolios when adjusted for risk. Without knowing your portfolio we will simply never know.

Many people here can talk a big game, but when it comes down to the actual data they simply crap out.

xerty said: fixed fee DFA advisors: http://www.retireearlyhomepage.com/dfaadv.html

from the article said: While some DFA advisors accept accounts of $100,000 or less, the consensus is that you should probably wait until you have at least $1 million to invest before considering DFA funds. This will give you a larger asset base to absorb the burden of the additional DFA advisory and custodial fees.

Looks like most of us (except for SIS) need to stick w/ vanguard for at least a few more years

As far as I understand both DFA and Vanguard are passive. You can buy Vanguard mutual funds directly from their site (no commissions).
The DFA site directs individual investors to look up an investment advisor. Wouldn't DFA advisers assess commissions?
Vanguard mutual funds and ETFs have very competitive expense ratios on a wide range of styles. Not sure DFA or another niche fund family can beat that.

Interesting and relevant data points from: http://www.fundadvice.com/articles/investing-basics/ten-years-of-superior-performance-was-no-accident-2.html

"• The Nasdaq Index comprised many of the fastest-growing U.S. companies in 1999, including telecommunications and technology. Ten-year return: -3.2 percent.
• The S&P 500 Index contains a somewhat more conservative mix of large-cap U.S. stocks, including many household names like Proctor & Gamble, Coca-Cola, General Electric and Pfizer. This index is often viewed (inaccurately in my view) as a proxy for the whole U.S. stock market. Ten-year return: -1.5 percent.
• Microsoft stock was the darling of Wall Street for at least a dozen years. During a period spanning more than a decade, according to a study published in the 1990s by The Seattle Times, there was no period when Microsoft stock failed to at least double in value if it was held for three years. Ten-year return: -4.6 percent. Anybody who had predicted that in 1999 would have been regarded as a lunatic.
• Bill Miller attained guru status and was often hailed as an investment wizard because he managed the Legg Mason Value Trust mutual fund so that it beat the S&P 500 Index in every calendar year for 14 years straight. Ten-year return: -4.2 percent.
• For decades, Warren Buffett has been regarded as a legendary investment guru. He still is, even though his Berkshire Hathaway stock (which in many ways resembles a mutual fund with his chosen stock holdings) once lost nearly half its value in a year when almost everything else was gaining. Ten-year return: 3.3 percent.
• Essentially a definition of stodgy investing for people who don’t want to risk a thing, one-month Treasury bills are regarded as a worthy substitute for cash. Ten-year return: 3.6 percent.

In other words, 10 years ago you could have invested in these risk-free securities while the bull market was still raging, and outperformed Microsoft stock, the S&P 500 Index, the Nasdaq and two of the most widely hailed investment gurus of our times.

If you’re reminding yourself that it’s normal to have occasional periods when stocks just don’t do all that well, you are right. If you’re following along, you know that there are two more numbers that we haven’t revealed yet.

• For many years we have recommended a portfolio of low-cost Vanguard funds that include the equity asset classes we recommend. The results of this and our other public recommendations are tracked by Hulbert Financial Digest, with which we have no ties of any kind. Ten-year return: 3.3 percent.

• Finally we come to the hundreds of Merriman all-equity managed accounts during this period using a carefully selected group of Dimensional Fund Advisors asset-class funds. Although most of our accounts include fixed-income assets, many clients can tolerate the risk of 100 percent equities. Ten-year return: 4.3 percent. That is the highest return in this table, calculated after deducting our management fees and all other costs.

There you have the facts. I don’t know if anybody actually followed our Vanguard recommendations to the letter for 10 years. But I do know that many of our clients actually achieved our managed all-equity returns of 4.3 percent."

BiomedGeek said: jwillgoesfast said: Looks like most of us (except for SIS) need to stick w/ vanguard for at least a few more years or tripB, who has been aggressively expanding his lemonade stand business

Don't forget his "post retirement for-profit non-profit organization"

zmre2b9 said: This draft paper (apparently to be published in _journal of investing_), http://www.econ.duke.edu/Papers/PDF/Vanguard_Versus_DFA_30%20jul...

examined Vanguard vs DFA (net adviser fees) and concluded:

"Focusing on all our results, DFA’s equity portfolio has substantially outperformed
Vanguard’s index portfolio from the beginning of 1999 through the end of 2006. But
much of that is due to DFA’s emphasis on small and value stocks. Still, even after
adjusting the Vanguard portfolio to achieve comparable style, DFA outperformed.
We do find that advisors performed a service in generating higher returns for
investors than could be achieved by replicating past portfolios, but the differential does
not pass a standard significance test.
Our major result is that over the eight year period: 1999-2006, the DFA portfolio
outperformed the Vanguard portfolio which mimicked its style by 2.57%/ year. The result
was bracketed for the average annual outperformance, where we adjusted the Vanguard
comparison index annually and every two years: 3.81%/year and 1.00%/year. An
investor with $100K could pay as little as 1.265% per year in advisor and transaction
fees, which would have left him with a 1.165% surplus from making the switch. Taking
the middle number, an investor with $10Million could pay as little as 0.0116%/year
which would have left her with a 2.42% surplus. Risk adjusting these differentials
reduces them by 0.1%/year. Thus, the enhanced indexing strategy of DFA has, over the
period considered, outperformed the passive indexing strategy of Vanguard.
We wonder whether a portion of the DFA outperformance may reflect its indexation
of parts of the market which were previously unindexed, which pushed up the returns to
these market segments during the period when these new indexes were coming to market.
If that is the case then one would not expect to see such outperformance replicated in the
future. However, we do not see evidence of a shrinking performance differential."

This is interesting and 2.57% per year looks impressive.
However, expense ratios are not linear (flat fee in the fee structure?). So for a small investment (say $10k) the costs could be higher.

Here is a good article describing DFA and contrasting with Vanguard (and explaining the passive/active issue) http://summitportfolio.com/DFAvsVanguard.html

DFA manages $86 billion and has 40 funds, all of which are managed in-house following a passive investment strategy. DFA is selective in what they offer, focusing only on asset classes where research can document a reward for risk taken. Investors cannot buy DFA funds investing in long-term bonds, non-investment grade debt (junk bonds), “growth” companies, or commodities since they believe these assets have failed to demonstrate sufficiently attractive risk/reward characteristics to deserve a place in diversified portfolios.

DFA relies on rigorous academic research to identify high return dimensions of the market, and then structures portfolios which capture these returns. If no recognized benchmark exists to track a particular asset class, DFA essentially breaks new ground and creates its own. Their implementation may be passive, but their research and trading effort is decidedly “active.”

As a result of this approach, many DFA funds have no direct competitors, either from Vanguard or other index managers. Investors seeking to capture the returns of the following asset classes can choose the appropriate vehicle from DFA, but have no comparable passively managed fund available from Vanguard:

Global (dollar hedged)Short Term Bonds
International Large Value Stocks
International Small Stocks
International Small Value Stocks
United Kingdom Small Company Stocks
Continental Europe Small Company Stocks
Japanese Small Company Stocks
Pacific Rim Small Company Stocks
Emerging Markets Small Stocks
Emerging Markets Value Stocks
U.S. Microcap Stocks
Tax-Managed U.S. Large Value Stocks
Tax-Managed U.S. Small Value Stocks
Tax-Managed U.S. International Large Value Stocks
US Core Equity (I, II, Vector Funds)*
International Core Equity*
Emerging Market Core Equity*
*Value and Small Cap weighted total market portfolios

. . .
DFA’s Large Value Portfolio buys only those companies falling into the top three deciles (30%) of a book-to-market ranking, producing a smaller portfolio (214 stocks vs. 399) with clear value characteristics. This more refined approach to large value stocks had a return premium of 1.45% annualized over the Vanguard (S&P Value) strategy from the date of index data inception, January 1975 through March 1993. For the period when both the DFA and Vanguard Large Value Funds share common live operations (April 1993 through December 2005) the DFA fund produced 1.65% (12.30% vs. 10.65%) better annualized return.

Another example of this difference is in the DFA Small Value Fund, designed to track the Fama-French Small Value Index versus the Vanguard Small Company Index Fund designed to track the Russell 2000 Value Index. From inception (January 1979) of the Russell 2000 Value Index, the Fama-French Small Value Index had an annualized return advantage of 1.54%. For the period when the two funds share a common live period, June 1998 through December 2005, the DFA fund produced 3.69% (13.01% vs. 9.32%) better annualized return.

Unlike conventional index managers, DFA devotes considerable effort to minimize trading costs. This is given a higher priority than maintaining perfect weighting versus a paper index. DFA’s unique “patient buyer” discount block trading strategy has produced negative trading costs for the DFA U.S. small company funds since their inception. When one considers that a paper index escapes the costs of running a live portfolio-(management fees, brokerage commissions, record keeping, etc.), this is an extraordinary achievement.

5 years
DFSVX 2.46
BUFSX 6.66
MYFUND 6.95

10 years
DFSVX 8.45
BUFSX 12.58
MYFUND 11.48

Total Return----2002 2003 2004 2005 2006 2007 2008 7-09

(3 stars) DFSVX -9.3 59.4 25.4 7.8 21.6 -10.8 -36.8 16.2
(5 stars) BUFSX -25.8 51.2 28.8 3.2 14.0 -0.3 -29.8 28.2
(5 stars) MYFUND 2.6 45.8 30.7 2.3 28.5 2.3 -33.9 25.2

Source: Morningstar 8/8/2009

jviken said: zmre2b9,

I do not understand your agressive pitch for DFA. They have good funds I acknowledged, I prefer vanguard because past returns do not guarantee future ones. A vanguard portfolio with something like 30% bonds, 70% stocks split to something like 17.5% Total Stock Market, 17.5% Small Cap Value, 17.5% total international, 17.5% International Small cap, would return something close to the DFA approach I bet. Plus the only thing you can control in investing is the fees, and this minimizes the fees.

You have yet failed to acknowledge your error stating that vanguard does not have a small cap international fund, so your credibility is waining IMHO.

I quoted someone from an earlier fatwallet thread. When you see quotation marks "" that indicates that the person is quoting someone else. Read the OP again. I quoted an old FW post. I don't know if they were wrong at the time about a Vanguard small cap international or not. I don't consider it very relevant. Do you have any useful information to add to the discussion?

Oh, you said [A Vanguard portoflio] "would return something close to the DFA approach I bet"

I especially like the very persuasive closing "I bet". I think Perry Mason often ended his closing arguments with that fine oratorical flourish. How did you arrive at this conclusion? Did it come to you in a dream? Or is there some other basis, evidence, study, published article, prophesy, astrological reading behind this conclusion?

RedCobra said: 5 years
DFSVX 2.46
BUFSX 6.66
MYFUND 6.95

10 years
DFSVX 8.45
BUFSX 12.58
MYFUND 11.48

Total Return----2002 2003 2004 2005 2006 2007 2008 7-09

(3 stars) DFSVX -9.3 59.4 25.4 7.8 21.6 -10.8 -36.8 16.2
(5 stars) BUFSX -25.8 51.2 28.8 3.2 14.0 -0.3 -29.8 28.2
(5 stars) MYFUND 2.6 45.8 30.7 2.3 28.5 2.3 -33.9 25.2


Source: Morningstar 8/8/2009

There will always be some active funds that beat passive funds in any given period. The problem is that usually the active funds that are good performers during one period, become poor performers during the next period. The passive index fund always tracks (or in the case of DFA, sometimes slightly improve on) the intended asset class.

RedCobra said: Full Disclosure:

1. I do not work in the financial services industry.
2. I do not own shares in any DFA fund and will not realize any financial gain from the sale of any DFA product.
3. I have no agenda posting in FW other than to share information, learn, and help fellow FWers.

Why waste our time with pointless posts like this? Please dear god, let's not have everyone else who also doesn't work in the in the financial services industry (which includes me) and doesn't own DFA shares (which includes me) post a similar stupid "Full Disclosure" post.

Redcobra, since you purport to post to FW to share information, can you actually share information rather than pollute the thread with idle nonsense?

Puckah18, based upon your definition, American Funds don't qualify as active because they don't have a benchmark that they are trying to beat.

It's not the job of the fund to make sure that there is a way to grade it and track how it performs.

How a fund gets "graded" is an external event. Passive vs. Active is an intenal event. American Funds can't properly be measured against an index, yet they are actively managed. DFA can't properly be measured against an index, yet they are passively managed.

Pukah, this is where I think that you have a hang up. DFA has come up with a strategy that they believe will allow them to outperform. Because they had to actively choose that strategy, it appears to you that it is an active fund. However, an index fund also starts because someone actively decided that the best way to invest was to mimick a certain index. Both are passive investments.

Equity based unit investment trusts are also passive investments. A specific stock picking strategy is decided upon in advance. The stocks that fit these pre-determined strategies are purchased and then nothing is ever bought or sold. Once chosen, no active management takes place.

I guess that what I'm trying to say, is it's not the original decision on how to pick the stocks that determines active or passive, but rather what happens once the portfolio is put together that determines whether it is active or passive.

The only difference between DFA and Vanguard index funds is that the decision on what stocks qualify for the fund is different.