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Mkt-RF SMB HML RF
6.06% 2.22% 4.01% 3.52%
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1.0265 0.9784 0.9708 1.0022
Rick Ferri wrote:Another often confusing item about HmL and SmB factors are that they relative to growth stocks and large cap stocks, not to the market.
In other words, to have actually earn the FF 3.9% HmL Research Factor premium (June 1927 to May 2013), you would have had to short all the low book-to-market stocks and go long all the high book-to-market stocks in the FF database, and do it at no cost.
Index products (including DFA Funds) don't short growth stocks to earn a HmL risk permium. From June 1927 to May 2013, the Dimensional US Marketwide Value Index returned 11.53% while the Dimensional US Market Index returned 9.84%, a difference of 1.69%. During the same period, the Fama/French US HmL Research Factor was 3.89%. Thus, the HmL premium of a value stock portfolio is less than half the HmL research factor premium, and this is before trading costs and management fees.
The lesson is that if you're expecting a 4.0% excess return over the market because you own all value funds, you're going to be disappointed. You'll earn perhaps a 1.5% premium after fees if the 4.0% HmL premium occurs in the future is as it was in the past AND you keep your costs extremely low.
BTW, paying an adviser 1% to do HmL and SmL portfolio tilts does not add up to excess returns for you. All the excess return from tilting plus some goes to the adviser to pay their fee. If you're thinking about paying an adviser 1% just to gain access to DFA funds, you're better off self-managing using cheap total market funds and forgetaboutit.
Rick Ferri wrote:Dave,
Equity ETFs are a far more tax-efficient fund structure than open-end funds. There are no capital gain distributions from ETFs to worry about (with seasoned ETFs that have sufficient assets). This is due to the way shares are created and redeemed "in-kind". Capital gains only occur when you decide to sell shares. So, if you're looking for tax-efficiency, then you should be looking at an equity ETF portfolio.
Gus Sauter wrote: A lot of investors are familiar with the in-kind redemption process that occurs in ETFs and it does lend tax efficiency to ETFs. However, I think, many investors misunderstand that that's not a tax regime that is solely available to ETFs. In fact, it's available to any mutual fund, any regulated investment company as all mutual funds are.
So, our regular mutual fund can take advantage of the same in-kind process and gain tax efficiency from that. If we have a large redemption, instead of paying the redeeming investor out with cash, we might give them securities. In other words that's an in-kind redemption in securities, and that turns out to be a very tax efficient way to do distribution. And so, that tax efficiency isn't just available to ETFs, it's available to all mutual funds, really, any regulated investment company.