DFA vs Vanguard Portfolios - Big Difference Over Last 10 yrs

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Multifactor Advisor
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Post by Multifactor Advisor »

davidkw wrote:
And if 97% of returns is simply your exposure to market, size, and value, and the Russell 2000 Value Index has a greater size tilt and the same value tilt as the DFA Targeted Value fund, yet has underperformed by 2.5% per year since 2000 despite large positive small and value premiums, what am I missing? Thats a big difference to be explained by "the other 3%".
During the past 10 years, value stocks did well especially in the 2000 - 2002 market, and during the 90s, the growth stocks did well. Be interesting to see how the DFA funds do when value stocks dominate
David: if you look at my post closely you find that I controlled for size/value exposure in my example. Russell 2000 Value has the same value exposure and greater size exposure than the DFA fund. So, if anything (if 3F slopes are all that matter), we'd expect to see the DFA fund underperform over the last decade.

And, we don't have to guess about returns in growth led markets, we can check the average index returns from 1979-1999 during all 12 month periods (n=98 ) where the Fama/French Value factor was negative:

Russell 2000 Value: +15.0%
DFA Targeted Value Index = +18.4%
High BtM minus Low BtM = -7.6%
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Rick Ferri
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Post by Rick Ferri »

Multifactor Advisor wrote:Rick: what you said was "I'm an advisor also and I'm agnostic to DFA, Vanguard, WisdomTree, Bridgeway, et. all". That sure sounds like "all indexes are basically the same and you can pick any combo of them (controlling for h and s slopes) and get the same results". We of course know that is not the truth. Fund selection matters a lot.
You're twisting words. I've never said all indexes are the same. In fact, I wrote two books on why they're not the same, All About Index Funds and The ETF Book.

To clarify, I don't care which fund company provides the fund I select for a category as long as I liked the strategy and the fee is low enough. That's much different than your interpretation that I said "all indexes are basically the same".

To be crystal clear, I'm not wedded to DFA, or Vanguard or any other fund company. Unlike a few advisors who post on this forum now and many who have posted in the past, I refuse to market my firm by praising a particular fund company knowing that the public has to pay an advisor to gain access to that company's funds even if some of the funds are superior.
And, for all it's shortcomings, I can't help notice the Russell 2000 Value ETF has outperformed the S&P 600 Value ETF by 0.6% annually over the last decade. So it appears I could pick a worse index! (incidentally, this underperformance penalty acts like a hidden "opportunity cost" to investors whose active indexing methodology choose the wrong index)
Now that you're pushing the issue, I recall that the DFA Small-Cap Value fund had a windfall return one year in the early 2000s as investors tax-loss harvested out of that fund and into the new (at the time) DFA Tax-Managed Small-Cap Value fund. Due to large flows out of the fund, DFA couldn't buy new value stocks (many communications stocks) that turned out to be death traps. This lack of ability to execute turned out to be a blessing because it caused the fund to have significant outperformance over what it should have had if DFA actually did buy what they wanted to buy. This unusual period of pure luck happened through no brilliance or fault of DFA. I'm sure you will remember this period if you decide to remember. :wink:

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cldrunner
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by cldrunner »

I don't think so!!

Well, this thread is over a year old but I found it interesting how returns have come full circle. It looks to me like the Vanguard Funds are actually performing very well against the DFA funds. Returns are posted on Scott Burns Asset Builder website. Interesting how Scott Burns calls the DFA Funds "Smart Funds" while the "dumb Vanguard funds :annoyed " are actually doing just as well or better in most categories. This does not even include using the Admiral Shares for the lower cost and higher returns.
What is Modern Portfolio Theory?

Modern Portfolio Theory suggests that your portfolio should be diversified with REITs, international, emerging market, and United States equities. For us, the emphasis is also on the Fama/French factors that would focus on small cap and value. The basic idea is to get the highest possible return with the lowest possible risk, measuring the risk by price fluctuations.

Our focus on Fama/French and Modern Portfolio Theory lead us to Dimensional Fund Advisors (DFA - http://www.dfaus.com). DFA investment strategies are grounded in academic research. Vanguard is a first generation of index funds. DFA is a second generation of index funds, what the industry calls quantitatively active and Scott calls smart index funds. Finally, to get the tilt toward value and small cap funds, there are significant gaps in the Vanguard strategy.
See the Results for yourself

The following performance results represent the equity asset classes of interest for the AssetBuilder portfolios. While we could provide a great deal of commentary on the funds, the numbers speak for themselves given our desired value premise. We are still huge fans of Vanguard and will continue to be for an investment strategy available to all of Scott’s many valued readers.
http://assetbuilder.com/investing/dfa_vs_vanguard.aspx

I wonder if many DFA Advisors are changing a few of their DFA Funds over to Vanguard???
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

just add two comments
First, as I have said many times, one things that people forget is that higher tilted portfolios can be used not to show higher returns but same expected return with lower potential dispersion which all risk averse investors should want as long as they can accept psychological problem of tracking error risk. You do that by using the higher tilts to allow you to hold less beta risk--the "larry" portfolio as written up in NYT and I have discussed here for long time. It just seems to never be mentioned, just the higher return part, which is okay, but that is in return for more risks, different kinds of risks but more of them.

Second, this was on the issue of the accumulator in late stage with big K gains. Here you have to do the math remembering that the tax you pay is only a time value of money issue if you are going to sell at one point, not a lost taxes. If not planning to sell then lose step up in basis potential. And note now is best time to sell as not only likely K gains going up but will have the higher Medicare tax on top of 20% rate. So if you pick up say increased tax efficiency by moving to core and TM funds you don't need that much difference in returns to make up for the tax difference. We recently moved lots of dollars from taxable DFA small value fund to Bridgeway small value even when gains were large as the math showed it was high IRR in terms of expected return difference gained.

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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by E-M-H »

With regard to the chart: I was redirected to the chart page last week when I mistakenly typed bogleheads.com into my browser. This type of redirection does not reflect well on a company. First impressions count, but this first impression made me think of the numerous cybersquatters about which no further comment is needed. Based on this thread I'll look more closely but I have to admit that I was hesitant to click on anything on that site.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Jerry_lee »

cldrunner wrote:I don't think so!!

Well, this thread is over a year old but I found it interesting how returns have come full circle. It looks to me like the Vanguard Funds are actually performing very well against the DFA funds. Returns are posted on Scott Burns Asset Builder website. Interesting how Scott Burns calls the DFA Funds "Smart Funds" while the "dumb Vanguard funds :annoyed " are actually doing just as well or better in most categories. This does not even include using the Admiral Shares for the lower cost and higher returns....I wonder if many DFA Advisors are changing a few of their DFA Funds over to Vanguard???
I guess we are referring to short term returns in this post? I doubt the long term results have changed much with the addition/deletion of one year since 2011. I know this much, if an investment advisor advises their client to sell an investment based on a short term (lets say 3 year) result, you should fire that advisor. Short term results are all but meaningless, and receive far more attention than they should on this site. Discipline is the name of the game, and at no time is it needed more than when your well thought out long term investment selection goes through a short bout of underperformance (or negative returns). Unfortunately, most react to this underperformance as a sign that there is something wrong with their choice, and instead jump to another investment that has done better and also on the cusp of underperformance as the merry-go-round never stops.

But I am not even sure that is the case (that short term DFA returns have been poor, or "come full circle" compared to Vanguard). Granted, Vanguard is deficient in a few key asset class categories that make DFA vs Vanguard comparisons difficult, and many of DFAs asset class funds have stronger exposures to small and value stocks, but we can try--and the value factor globally hasn't been strong the last few years, so that should wash out in the comparisons. Here are the 3 year return differences across various equity and fixed income asset classes:

DFA Enhanced US Large Co Fund = +29.7%
Vanguard S&P 500 Index Fund = +28.5%

DFA US Large Value Fund = +35.4%
Vanguard Value Index Fund = +28.4%

DFA US Small Cap Fund = +38.9%
Vanguard Small Cap Index = +37.6%

DFA US Small Value Fund = +38.7%
Vanguard Small Cap Value Index = +36.8%

DFA Int'l Value Fund = +26.8%
Vanguard Int'l Value Fund = +22.1%

DFA Int'l Small Cap Fund = +28.0%
Vanguard Int'l Explorer = +26.9%

DFA Emerging Markets = +33.2%
DFA Emerging Value = +37.1%
DFA Emerging Small = +41.9%
Vanguard Emerging Markets Index = +32.1%

DFA 5YR Global = +5.3%
Vanguard ST Bond Index = +4.0%

DFA Inflation Protected Bond = +11.7%
Vanguard TIPS Fund = +10.7%

So I see a couple of +1%s, +1.5%s, +2%s, and an outlier or two of +5% advantage of DFA over Vanguard. But the 1-2% advantage seems to be holding in the short run, even during a period where value hasn't beaten growth and DFA should do very poorly given their stronger value exposure.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Jerry_lee »

larryswedroe wrote:just add two comments
First, as I have said many times, one things that people forget is that higher tilted portfolios can be used not to show higher returns but same expected return with lower potential dispersion which all risk averse investors should want as long as they can accept psychological problem of tracking error risk. You do that by using the higher tilts to allow you to hold less beta risk--the "larry" portfolio as written up in NYT and I have discussed here for long time. It just seems to never be mentioned, just the higher return part, which is okay, but that is in return for more risks, different kinds of risks but more of them.

Second, this was on the issue of the accumulator in late stage with big K gains. Here you have to do the math remembering that the tax you pay is only a time value of money issue if you are going to sell at one point, not a lost taxes. If not planning to sell then lose step up in basis potential. And note now is best time to sell as not only likely K gains going up but will have the higher Medicare tax on top of 20% rate. So if you pick up say increased tax efficiency by moving to core and TM funds you don't need that much difference in returns to make up for the tax difference. We recently moved lots of dollars from taxable DFA small value fund to Bridgeway small value even when gains were large as the math showed it was high IRR in terms of expected return difference gained.

Best wishes
Larry
That is one way to look at it, but I don't think concentrating a big chunk of a portfolio in fixed income (with the rest in SV) is generally a good idea or even the primary take away from the size and value research. First of all, we know that this approach has worked well in the past as safe fixed income returns of intermediate to long duration have done exceedingly well as interest rates have fallen. With bond heavy allocations, this result matters as much as the return on riskier equities. With rates at historical lows, any up tic in interest rates could cause fixed income losses to more than offset small and value premiums on a small % of the overall portfolio. And contrary to recent opinion around here, stocks and intermediate and long term bonds have historically, and can again, move largely in lockstep.

Further, I can't help but wonder if this approach speaks more to the equity averse, recency bias influenced investor who has had it with stocks given poor returns since 2000 (while ignoring much higher expected returns today). Maybe not, but look deep within to make sure you aren't chasing yesterday's results, only to find out a long pronounced bull market in equities that coincides with small or negative small and value premiums (as we saw in the 80s and 90s) and rising real interest rates has you with a very disproportional allocation for your goals.

I much prefer the more universal (and at one point the only) application of benefits to tilting to small and value stocks: by doing so, at a given level of stock/bond, you can afford to hold safer, short term high quality fixed income and avoid taking the risks associated with longer term bonds (in general, you should try to avoid higher risks in the "safe" part of your portfolio, and low credit qualities and longer maturities are risks, no doubt), but your overall portfolio won't have a lower return than a market oriented equity and total bond index like allocation. With shorter term high quality debt, you have an asset class that is fairly inflation sensitive, should generate positive returns in almost any environment, and due to its low risk, is a reliable portfolio risk reducer in rising or falling rate environments. This is how I believe the vast majority of investors should implement the research, not to hold 20-30% equities all in SV in hopes of getting equity like returns with less risk. It may work out just fine, but there is no need to go to these extremes.
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Clearly_Irrational
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Clearly_Irrational »

The comparison is completely worthless because it's showing the wrong numbers. How about doing it the right way and give us a multi-factor regression so we can see what was related to beta/small/value and what was alpha? Kind of disingenuous to tout superior performance that's most likely due to heavier small/value loading and not alpha.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Rick Ferri »

Just to muddy the water more, a FF Three-factor regression uses book-to-market (BtM) as the value factor. Since BtM is primarily how DFA selects value stocks, how can those specific funds NOT show a high value factor? DFA funds don't regress as high to value if price-to-earnings (P/E), price-to-cash flow (P/CF) or any other value criteria is used. They still rank well, just not as high as when only BtM is used.

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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Clearly_Irrational »

Rick Ferri wrote:Just to muddy the water more, a FF Three-factor regression uses book-to-market (BtM) as the value factor. Since BtM is primarily how DFA selects value stocks, how can those specific funds NOT show a high value factor? DFA funds don't regress as high to value if price-to-earnings (P/E), price-to-cash flow (P/CF) or any other value criteria is used. They still rank well, just not as high as when only BtM is used.

Rick Ferri
I think it would be fair to judge them on a FF regression since that's the kool-aid they're selling. (which I happen to buy into as well, though not with DFA funds currently) The implied claim in the comparison was "we did the same thing but better" so factoring out extra risk they took on beta/small/value side and only looking at alpha seems like it would be right metric.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Jerry_lee »

Clearly_Irrational wrote:The comparison is completely worthless because it's showing the wrong numbers. How about doing it the right way and give us a multi-factor regression so we can see what was related to beta/small/value and what was alpha? Kind of disingenuous to tout superior performance that's most likely due to heavier small/value loading and not alpha.
No, the comparison is fine, especially because I was answering a question/comment above saying Vanguard had outpaced DFA. Value minus growth has been negative over this period using MSCI US and Int'l indexes as our proxies, so even considering that DFA loads more on the value factor, a negative premium should produce lower returns, not higher.

Further, we know that small and value factors globally are independent and less than perfectly correlated. So combining asset classes that more purely capture the factors does not proportionally increase the portfolio risk. Yes the funds are riskier if they have more exposure to the risk factors, but if the risk factors have diversification benefits when combined, the portfolio will not suffer the same increase in overall risk.

This is no different than showing a 100% bond portfolio having less returns and higher risk than a 10% stock, 90% bond portfolio. Of course stocks are riskier than bonds, but thanks to the diversification benefit, a 10/90 returned 0.6% more from 1926-2011 with 0.3 less SD. You can tell me all day that adding stocks to a bond portfolio increases risks because stocks by themselves are riskier. But the portfolio perspective begs to differ.

Finally, lets realize that RISK is most accurately defined as a shortfall relative to goals. PERIOD. It's not standard deviation, its not loading factors, its not 1 year drawdowns. You could have a low SD, never lose money, and have a really risky portfolio if that allocation doesn't stand a chance or is less likely to achieve your goals. And a portfolio with less diversification across unique factors is more exposed to the return streams from just one risk/return behavior--i.e. it's more risky. Be it beta, credit, term, size, or value, an asset class basket of all of them has a more consistent return stream than a bet on just one or two of them, or a watered down allocation that doesn't effectively target any of them as good as they could or should.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Jerry_lee »

Rick Ferri wrote:Just to muddy the water more, a FF Three-factor regression uses book-to-market (BtM) as the value factor. Since BtM is primarily how DFA selects value stocks, how can those specific funds NOT show a high value factor? DFA funds don't regress as high to value if price-to-earnings (P/E), price-to-cash flow (P/CF) or any other value criteria is used. They still rank well, just not as high as when only BtM is used.

Rick Ferri
You are missing the point. Yes, regressing a P/B sorted fund on a P/B derived risk factor will show high loadings and high R^2'd and close to 0 alpha--or negative alpha if they can't transact.

But more problematic is that a fund that uses a multi-factor sort (as so many do today like S&P) may show a relatively lower portfolio loading (which may be mistakenly assumed to be lower risk), a slightly lower R^2, and the potential for higher alpha when regressed on a single factor like P/B. But that higher alpha is a mirage. If you filp it around and sort the multi-factor fund on a multi-factor return factor, you'll be back to higher loadings (the "risk"), higher R^2, and the alpha will disappear.

Further, I bet, but haven't checked, regressing a single factor sorted portfolio like DFA (uses P/b) on a multi-factor return series will show the same mirage as the S&P example above: lower loadings, lower R^2, and higher alpha.

All this gets to a point of nonsense. The returns are the retuns. And asset class risk matters less than portfolio risk. And when you combine asset classes with targeted exposure to unique return dimensions, you are more diversified than not. You can make it more complicated than that, just don't think you are accomplishing anything.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Clearly_Irrational »

Jerry_lee wrote:No, the comparison is fine, especially because I was answering a question/comment above saying Vanguard had outpaced DFA.
I was talking about the comparison shown in the link from the OP. It has an implied claim of "same but better" which isn't possible to evaluate given the information shown.
Jerry_lee wrote:Finally, lets realize that RISK is most accurately defined as a shortfall relative to goals. PERIOD. It's not standard deviation, its not loading factors, its not 1 year drawdowns.
There are many ways to define risk, that's definitely one of them, but I disagree that it's the only one.
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Post by unclemick »

Rick Ferri wrote:I'll repost this:
In the end, what drives 97% of equity portfolio performance is the amount of tilt your portfolio has to the market, to value stocks and to small cap stocks. The other 3% is the actual funds you invest in, and the cost to invest in those funds (not to mention the cost of an investment manager).


I'm an advisor also and I'm agnostic to DFA, Vanguard, WisdomTree, Bridgeway, et. all. I don't care which family of funds outperformed last week, last month, or last year. All I want is exposure to certain market risks that I select and in the cheapest way possible. If I can get those exposures with one fund company, OK; two fund companies, better, ten fund companies, even better.

I say this again because the dead horse we're beating is quickly becoming unrecognizable as this opinionated conversation continues.

Rick Ferri



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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

Just to point out that the last three years value premium has been negative so you would expect DFAs more value oriented funds to have not outperformed
09-11 was -3.6% annualized for total negative return of 10.5%

Look at longer data say 15 years and you have value premium more "normal" value premium was still low at 2.4% and compounded difference would be over 40%.

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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Rick Ferri »

Jerry_lee wrote:
Rick Ferri wrote:Just to muddy the water more, a FF Three-factor regression uses book-to-market (BtM) as the value factor. Since BtM is primarily how DFA selects value stocks, how can those specific funds NOT show a high value factor? DFA funds don't regress as high to value if price-to-earnings (P/E), price-to-cash flow (P/CF) or any other value criteria is used. They still rank well, just not as high as when only BtM is used.

Rick Ferri
But more problematic is that a fund that uses a multi-factor sort (as so many do today like S&P) may show a relatively lower portfolio loading (which may be mistakenly assumed to be lower risk), a slightly lower R^2, and the potential for higher alpha when regressed on a single factor like P/B. But that higher alpha is a mirage. If you filp it around and sort the multi-factor fund on a multi-factor return factor, you'll be back to higher loadings (the "risk"), higher R^2, and the alpha will disappear....All this gets to a point of nonsense.
I have done regressions using a multi-factor value model and it all does blend together. The risk reappears and the alpha disappears. DFA still comes out well, though, as does Morningstar's version of value. RAFI seems to work also. Heck, it ALL works some of the time. I think what's important is consistency. Whatever value method you use will work if you stick with it long enough.

Rick Ferri
Last edited by Rick Ferri on Fri Mar 09, 2012 9:10 pm, edited 1 time in total.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

Rick
FWIW the research I have seen is that multiscreens work better than single screen, as you get some diversification benefit and BTM doesn't work well with some industries like banks

One of the reasons we went with Bridgeway Omni vs DFA for SV

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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Rick Ferri »

Larry,

BAM and Bridgeway did a nice job with the structure of Omni. My desire is for a similar fund but based on an ETF structure where the in-kind creation and redemption process eliminates annual capital gain distributions. The elimination of capital gain distributions is going to be an increasingly important feature of ETFs starting in 2013 when investors get walloped with much higher taxes on fund distributions.

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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

Rick
Thanks, and yes ETFs can be more tax efficient, though not necessarily so. Especially when have TM funds or more importantly core funds (which eliminate/minimize need to rebalance between the funds)
And FWIW the whole idea of ETFs having different tax structure is IMO nuts. Either mutual funds should have same treatment or ETFs should have same treatment as mutual funds. This is totally form over substance

Finally if divs start to get taxed as ordinary income funds (like DFA) that screen for divs while holding loading factors stable will have big advantage for taxable investors.
DFA turned off their div screen when the Bush tax cuts went into place, but looks like they will have to turn it back on now.


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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Rick Ferri »

Fama French have argued the same issue for years, that traditional mutual funds should have the same tax benefits as ETFs. Investors in mutual funds should determine when to pay capital gains taxes rather than the fund manager. The fact is, equity mutual fund investors don't have the same tax benefits as equity ETF investors.

I beleive this is going to be a game changer for investors staring in 2013 when higher long-term capital gains rates and 3.8% Medicare surtax kick in. ETF companies are clamoring for the next big product and low-tax strategies are on the radar screen. It didn't take long for dozens of high dividend paying ETF to hit the market in recent years, and there will be plenty of low-divided paying value and growth ETFs created specificlly targeted at high net worth investors.

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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by pkcrafter »

One more time--Rick posted this a year ago and it still holds...
Let's stop beating a dead horse.

If you believe what DFA/Fama/French say, the DFA portfolios excess returns are a result of higher small-cap and value risks that investors take with those DFA funds. The Vanguard portfolio returns are a result of more market centric risks that investors take with Vanguard funds. To the extent that small cap and value stocks significantly outperformed the total market over the past decade, it is expected that the riskier DFA portfolios with greater tilts to value stocks and small cap stocks would have higher returns during the period measured. If they didn't outperform over the past 10 years, then DFA had real operational issues.

In the end, what drives 97% of equity portfolio performance is the amount of tilt your portfolio has to the market, to value stocks and to small cap stocks. The other 3% is the actual funds you invest in, and the cost to invest in those funds (not to mention the cost of an investment manager).


I put DFA funds in the same category as fundamental indexes.

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Re:

Post by VennData »

[quote="livesoft'] I'm still laughing at how they gave 110% of your money to the Vanguard allocation.[/quote]

DFA, the company that thinks individuals a too stupid to manage their own money... so don't forget the advisors fee ( for which you get nothing) on top of it.

I wonder why Vanguard doesn't have to desparately compare themselves to DFA?

I laugh every time someone tries to ram this DFA full fee crap down our mouths and always fail to mention how you have to hire some Dick Sickman to "help you."

DFA, get your own site.
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Re: Re:

Post by cheapskate »

VennData wrote:[quote="livesoft] I'm still laughing at how they gave 110% of your money to the Vanguard allocation.
DFA, the company that thinks individuals a too stupid to manage their own money... so don't forget the advisors fee ( for which you get nothing) on top of it.

I wonder why Vanguard doesn't have to desparately compare themselves to DFA?

I laugh every time someone tries to ram this DFA full fee crap down our mouths and always fail to mention how you have to hire some Dick Sickman to "help you."

DFA, get your own site.[/quote][/quote][/quote][/quote][/quote]

I think DFA (the company) is not to blame here. I haven't seen noxious, misleading marketing coming out of them. Their messages (and materials) are typically clear. All the marketing FUD comes from DFA advisors, who find it necessary to pump up DFA access as an excuse to rake in fees (A DFA advisor based out in Southern California whose name rhymes with DFA is the worst offender here). DFA has not done a good job of shutting down the misleading advertising done by their advisors.

I believe a lot of advisors who offer access to DFA do add significant value to their clients. I just wish they would focus their message on the aspects of investing/advice outside of DFA access more.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

Rick
I agree
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by dbonnett »

For performance during the last 3 to 5 years compare prf to dflvx; prfz to dfsvx; pxf to dfivx; pdn to disvx
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by kikie »

these type of posts, are sorta like bait; and seem to end up going off into various tangents, guess, that has it's place, but, isn't there any science to be found; like the OP could make a testable hypothesis 1st; and then one could not go round and round: like DFA adds enough Value that it's typical fees are worth the cost; is the bottom line, year over year return, or what standard should be applied that is not bias, 10 year return each new decade ? (how about Alpha or Beta or ?) seems "advising" to me; devolves into allocation tweaking ; I think that is a smart people game; I have trouble enough on stock/bonds ratios, myself, good luck
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

Paix
For what it is worth, as I have said many times, if you want simply access to DFA you can get it at very low fees, nothing near the 1% you hear quoted most of the time on this board
So that is mostly a bogus argument these days as there are many firms that offer low cost access and with the Internet anyone can find them
Best wishes
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by at »

larryswedroe wrote:Rick
Thanks, and yes ETFs can be more tax efficient, though not necessarily so. Especially when have TM funds or more importantly core funds (which eliminate/minimize need to rebalance between the funds)
I think DFA is an OK company to bet with but how do TM and core funds eliminate trading? If you don't trade, eventually the SML and HML will get very watered down. Even for market portfolios, you have to account for funds inflows and outflows which mandate trading.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

at
Core funds reduce the INTERNAL trading costs that results from stocks migrating from one asset class to another, estimated savings about 12-15bp

Core funds also then are more tax efficient, don't have to realize as many gains as turnover less.

If you own component funds you have to rebalance with your money. With core funds you rebalance with other people's money--the fund uses cash flows and divs to rebalance, an often overlooked benefit which can save/eliminate the transactions costs that can be incurred (if using a custodian like Schwab or Fidelity) and the k gains taxes.

TM funds use wider buy and hold ranges to attempt to earn highest AT, not PT, returns. That cuts trading costs and improves tax efficiency. And if they dividends become taxed at ordinary rates DFA will "turn back on" their dividend screener (not eliminating div paying stocks but keep loadings the same but reduce the allocations to the highest dividend payers)

Hope that helps

Larry
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by kikie »

isn't one still left with the ER headwind eg Intl SC value VG 0.37; DFA 0.70 ; perhaps what you said below would cover the spread on Tax efficiency; personally, I would hold this in an IRA, as my employer offers access, but i'm holding it in VG Institutional domestic at ER 0.11 or something ; and not a splitter ; but am tempted to use what access I have , though since it's a 403b ; if rolled over I would lose the fund , i guess ?
larryswedroe wrote:Paix
For what it is worth, as I have said many times, if you want simply access to DFA you can get it at very low fees, nothing near the 1% you hear quoted most of the time on this board
So that is mostly a bogus argument these days as there are many firms that offer low cost access and with the Internet anyone can find them
Best wishes
larry
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

paix
One has to go WAY BEYOND the expense ratio to make best decision
Have to also look at loading factors, screens, securities lending revenue (where generally DFA comes out well ahead) and of course tax management issues
Also on the location issue, all else equal should prefer to hold international in taxable and domestic in tax advantaged because if hold int'l in tax advantaged you lose the foreign tax credit

Larry
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Riprap »

For Rick and Larry,

Given that you both seem to agree on this:
Rick Ferri wrote:Fama French have argued the same issue for years, that traditional mutual funds should have the same tax benefits as ETFs. Investors in mutual funds should determine when to pay capital gains taxes rather than the fund manager. The fact is, equity mutual fund investors don't have the same tax benefits as equity ETF investors.

I beleive this is going to be a game changer for investors staring in 2013 when higher long-term capital gains rates and 3.8% Medicare surtax kick in. ETF companies are clamoring for the next big product and low-tax strategies are on the radar screen. It didn't take long for dozens of high dividend paying ETF to hit the market in recent years, and there will be plenty of low-divided paying value and growth ETFs created specificlly targeted at high net worth investors.

Rick Ferri
And considering this from Vanguard's website,

Shareholders of Vanguard stock index funds that offer Vanguard ETFs may convert their conventional shares to Vanguard ETFs of the same fund. This conversion is generally tax-free, although some brokerage firms may be unable to convert fractional shares, which could result in a modest taxable gain.

To lessen the effects of a possible return to old tax rates, does it make sense to convert mutual fund shares to ETF shares in taxable accounts? What are some possible unintended consequences, if any?
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by at »

larryswedroe wrote:TM funds use wider buy and hold ranges to attempt to earn highest AT, not PT, returns.
This would mean that TM funds are very watered down in the HmL and SmL aspect. Not exactly what DFA is trying to promote. Mutual funds such as the small-cap value funds do not have a TM version as the SCV strategy necessitates trading.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Bongleur »

larryswedroe wrote: Finally if divs start to get taxed as ordinary income funds (like DFA) that screen for divs while holding loading factors stable will have big advantage for taxable investors.
DFA turned off their div screen when the Bush tax cuts went into place, but looks like they will have to turn it back on now.
Larry
Good point. I want to see DFA (and Simba too) re-calculate all backtest data using the projected 2013 tax laws.

Backtesting has enough limitations wrt what you can conclude from it; but unless you are using current tax laws its _useless_.

And somehow factor in the low yield of bonds instead of their now-ended bull market behavior.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by Rick Ferri »

Walt in AZ wrote:Considering this from Vanguard's website,

Shareholders of Vanguard stock index funds that offer Vanguard ETFs may convert their conventional shares to Vanguard ETFs of the same fund. This conversion is generally tax-free, although some brokerage firms may be unable to convert fractional shares, which could result in a modest taxable gain.

To lessen the effects of a possible return to old tax rates, does it make sense to convert mutual fund shares to ETF shares in taxable accounts? What are some possible unintended consequences, if any?
Unlike all other ETF providers, Vanguard's ETFs are a share class of their open-end funds and distributions are exactly the same less differences in fees. So, there would be no tax benefit to converting.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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Re: DFA vs Vanguard Portfolios - Big Difference Over Last 10

Post by larryswedroe »

AT
Investors in tax advantaged accounts want the highest Pre-tax returns, they don't care about tax inefficiency.

Investors in taxable accounts don't care about PT returns, only AT returns. So there is a logical trade off for lower PT returns (caused by lower loading factors) and higher AT returns (reducing taxes paid)

So take a fund that has PT return of 10% and AT return of 8%. If by widening the buy and hold ranges (cutting trading costs and turnover and raising tax efficiency--and also avoiding any intentional ST gains) you lower PT return to say 9.5% but raise the AT return to 8.5% you would certainly want to do that for taxable accounts. And that is what DFA did.

The same thing is true for managing dividends. Prior to Bush tax cuts DFA had built a dividend screener, with idea of reducing dividends (taxed at ordinary rates) in taxable versions of their funds. The idea was to try and earn the highest AT return, even if sacrificed bit of PT return. (Note M* only rates on PT returns) So you would cut out the highest dividend payers while still trying to maintain your loading factors. DFA was only fund family I am aware of to do that. And I assume they will turn back on those screens if the tax law reverts

Hope that helps

Larry
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