QuietWealth wrote:...that their funds mirror a market index that has been created using the Fama/French Library. Essentially, they create their own market index for SCV stocks and then "passively" track it with their fund. Is that passive investing? I am sure to most no, but to some, yes. The debate will go on.
My understanding is that, no, that is
not what they do. It's all a little hard to disentangle, and I can't find this on their U.S. website, but:
DFA's Australian site saysBy not adopting an index approach, Dimensional can practise patient trading, focusing on price rather than time of execution, which can mitigate the effects of momentum and lead to lower trading costs.
Similar statements pop up in other places, although as I say I can't actually find them on Dimensional's own U.S. website. This one is typical:
Dimensional advantagesThe goal of an index-based strategy is zero tracking not return enhancement. Index-based strategies often pay liquidity premiums to minimize tracking error, especially around reconstitution dates. The reconstitution cost can be well over 1% per year for small cap index-based strategies. Dimensional avoids reconstitution costs by not tracking indexes...
Similarly, a document that's from their own U.S. website, but dated 2009, refers to
"flexible and patient trading."
It's not just a question of following a specially-constructed index. There are a fair number of mutual funds that actually do this, and say so. Dimensional's funds are
not simply index funds that happen to track the Fama-French indexes.
Ask yourself, if you invested in VBR, the Vanguard Small-Cap Value ETF, would you consider this an active or passive investment on your behalf?
Personally, yes, assuming that the only "management" is rebalancing to fixed allocations on a predetermined basis, in my opinion that would be a passive strategy.
It is not a MC weighted index and not dissimilar to what DFA does for some of their strategies...however, I am willing to bet that deep down a lot of people would call the Vanguard fund passive and the DFA fund active.
I can't speak to others. To me, even though I don't tilt, a tilted portfolio that constantly rebalanced to fixed-percentage allocations of index funds, such as the Coffeehouse Portfolio, are passive.
What about those who invest in S&P 500 index funds? There are rules and guidelines that help select the companies that are included in that index...not very passive. But, the fund itself "passively" tracks that index. So if an index is active, but a fund tracks it "passively" (never try's to beat it, just matching it) is this an active or passive strategy??
Passive.
In my personal opinion, I define passive investing by it's turnover.
Morningstar is showing Vanguard Small Cap Value Index fund, VISVX, 16% turnover; DFA US Small-Cap Value fund, DFSVX, 9% turnover. So, yes, in this case Dimensional has lower turnover. I think those are
both very low numbers.
For a "core holding," Vanguard Total Stock, VTSMX, turnover 3%; DFA US Core Equity, 4%. I won't claim there's any real difference.
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