"Vanguard Funds vs. Dimensional Funds in New IFA Index Portfolios" -- What's The Deal?

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Robert T
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Re: "Vanguard Funds vs. Dimensional Funds in New IFA Index Portfolios" -- What's The Deal?

Post by Robert T » Wed Oct 04, 2017 6:43 pm

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A problem with these types of comparisons often made by advisors is that they are not 'factor (risk) matched' comparisons i.e. the two portfolios have different value and size exposure, and if we believe Fama-French that these are 'risk' factors https://faculty.fuqua.duke.edu/~charvey ... n_risk.pdf , then the portfolios have different risk profiles - just a 75:25 Total Stock Market:Total Bond market has a different risk profile to a 65:35 split - for example.
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Re: "Vanguard Funds vs. Dimensional Funds in New IFA Index Portfolios" -- What's The Deal?

Post by skeptical » Wed Oct 04, 2017 7:18 pm

While I have not done an in depth analysis, from doing various "spot checks", DFA funds can cost you almost 1% if you are working in a good sized taxable account because of cap gains distributions

For example, using morningstar data, comparing DFA small cap value with two small cap value index funds:

15 year annualized returns before tax :

12.17 DFSVX (DFA small cap value )
11.71 IJS (iShares small cap value)
11.32 VISVX (Vanguard small cap value)

So, DFA beats Vanguard by .85 per year, making up for the advisor fee.

15 year annualized returns after tax :
10.85 DFSVX (DFA small cap value )
11.30 IJS (iShares small cap value)
10.76 VISVX (Vanguard small cap value)

DFA advantage shrinks to .09

Just last year, DFSVX had a 3.7% cap gain distribution, which you would need to pay anywhere from 15% to over 30% of that in taxes (15/20 cap gains tax, CA/NY state tax, 3.8% health care tax for high earners).

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Re: "Vanguard Funds vs. Dimensional Funds in New IFA Index Portfolios" -- What's The Deal?

Post by heyyou » Thu Oct 05, 2017 7:12 pm

Just last year, DFSVX had a 3.7% cap gain distribution, which you would need to pay anywhere from 15% to over 30% of that in taxes (15/20 cap gains tax, CA/NY state tax, 3.8% health care tax for high earners).
Not everyone has tax problems. In retirement, some of us live in low cost areas, store our highest expected return funds (SCV) in our tax sheltered accounts, keep our large cap blend fund our taxable account, and still have some tax space for both Roth conversions and cap-gains un-taxed in the 15% bracket. Note that cap gains are added on last, so when they spill into the 25% tax bracket, the tax on the spillover is only 15% there. I worry less about my marginal rate, and more about my overall tax/income ratio.

There are many tax refugees retired here from high cost-of-living (HCOL) areas.

On topic:
Trev H's four fund portfolio of Vanguard's LB, SCV, ILV, ISB, is an attractive compromise of slice and dice vs. low cost.
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Re: "Vanguard Funds vs. Dimensional Funds in New IFA Index Portfolios" -- What's The Deal?

Post by Robert T » Fri Oct 06, 2017 6:43 am

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FWIW - I track two portfolios with the same/very similar factor exposure - one with DFA funds and the other with non-DFA funds.

2003 to date .... the two portfolios have the same annualized return - consistent with Fama-French research.

"Over the long-haul what matters is factor exposure and expense." This should be the focus rather than on the marketing noise.

Robert
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Re: "Vanguard Funds vs. Dimensional Funds in New IFA Index Portfolios" -- What's The Deal?

Post by packer16 » Fri Oct 06, 2017 11:20 pm

I agree the IFA pitch is marketing. As an exercise to show how unstable these relationships are go to Morningstar and graph the DFA fund vs. the Vanguard SCV over various start dates. What you find is that if you choose a date before 2003 DFA has a better return and after 2003 Vanguard does. The DFA fund has larger factor exposure & higher costs and it appears the higher exposure was not able to overcome the higher costs since 2003. This pattern appears to show that the value factor (as implemented by DFA) has been arbed away over time. If this is occurring, how do you know the value factor is not even more arbed now & how do you know of there is enough value factor left to offset the additional costs? It would make sense as more money goes into this active strategy its outperformance should decline. To think of it as an index strategy that relies on the market to set the correct price is misleading as the factor index has weights that are different that what the market has set in hopes of getting a better risk/return relationship. Also the weights are constantly changing over time.

What I see that is being arbed here is the value factor (as implemented by various AM firms) not the occasional mispriced security that can be uncovered using value investing. So value investing will endure while the value factor will get arbed.

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Re: "Vanguard Funds vs. Dimensional Funds in New IFA Index Portfolios" -- What's The Deal?

Post by Robert T » Sat Oct 07, 2017 6:24 pm

packer16 wrote:
Fri Oct 06, 2017 11:20 pm
What I see that is being arbed here is the value factor (as implemented by various AM firms)...
An extract from this earlier article: https://www.aqr.com/cliffs-perspective/ ... s-about-it
  • "Using the Fama-French approach (data from Ken French’s website) below, we plot the ratio of the summed BE/ME (book-to-price) of the cheap one-third of large stocks over the BE/ME of the expensive one-third of large stocks (all U.S.) through June of 2014. In brief, the cheap will always have a higher BE/ME than the expensive, that’s a tautology, but how much cheaper can and does vary dramatically through time, and seems to be a reasonable, intuitive and empirical measure of prospective long-run expected returns to the systematic value factor (as in all these predictions, it’s far weaker short term and still far from perfect long term). The red line is the median, and higher implies cheap is cheaper than usual versus expensive:"
  • Image
This relative value spread for US large caps and small caps has not shrunk since this earlier article, if anything, its widened (6-8 percent) since June 2014. As of 8/2017 it was above the long-term median for large caps and small caps.
And from another article: https://papers.ssrn.com/sol3/papers.cfm ... id=2912287 my underline.
  • "Some exchange-traded funds (ETFs) are specifically designed for harvesting factor premiums, such as the size, value, momentum and low-volatility effects. Other ETFs, however, may implicitly go against these factors. This paper analyzes the factor exposures of US equity ETFs and finds that, indeed, for each factor there are not only funds which offer a large positive exposure, but also funds which offer a large negative exposure toward that factor. On aggregate, all factor exposures turn out to be close to zero, and plain market exposure is all that remains. This finding argues against the concern that factor premiums are rapidly being arbitraged away by investors in ETFs."
Obviously no guarantees.
Robert

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Re: "Vanguard Funds vs. Dimensional Funds in New IFA Index Portfolios" -- What's The Deal?

Post by packer16 » Sun Oct 08, 2017 8:30 am

The problem with this analysis is context. How much cheaper should they be due to their lower growth rates & higher leverage? Has the levels of relative growth & leverage growth increased so we would expect an increase or a decrease? There is probably a theoretical amount which is not estimated. Instead historical data was used that we know includes periods of time when the market was less efficient. IMO this is lazy analysis which does not tell is much as the implicit assumptions of constant relative growth & leverage are not disclosed or checked to see if they are still true.

Also the theoretical ETF study does not address the huge factor shortfall of recent years. It answers a different questions, do ETF on average arb the factors away? The approach is to say on average ETFs have neutral factor exposure. This assumes that factors can cancel each other out & is also based upon the assumption that factors are constant in each security so the cancellation can be expected to occur in the future. This is huge and false assumption. The non fundamental factors are not constant so the conclusion is inconclusive. That is not the real question. The real question are these enough factor based ETFs & a funds to arb away the factor premiums? They do not test the hypothesis that non-characteristic factors can be arbed & what would that look like? It would look like what we are seeing now, initial outperformance followed by underperformance.

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