Securities lending revenue: DFA vs vanguard.

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jackal
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Securities lending revenue: DFA vs vanguard.

Post by jackal » Wed Sep 13, 2017 4:01 pm

Does anyone know or can anyone help me figure out whether the securities lending revenues of a dfa fund (ex: small cap value) can offset the difference in expense ratios when compared to a similar vanguard fund?
Thank you!

sport
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Re: Securities lending revenue: DFA vs vanguard.

Post by sport » Wed Sep 13, 2017 4:03 pm

If you look at funds in both companies that track the same index, you should get an answer to your question.

jackal
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Re: Securities lending revenue: DFA vs vanguard.

Post by jackal » Wed Sep 13, 2017 5:30 pm

The only such fund I could find was the s and p 500. For most other funds, looks like dfa has its own custom indices with different factor weights. Hence the question.
Using portfolio visualizer there is a more negative alpha for dfa but not sure if this is because of the difficulty trading in niche markets or just the higher expense ratio.

grok87
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Re: Securities lending revenue: DFA vs vanguard.

Post by grok87 » Wed Sep 13, 2017 6:59 pm

remember Vanguard gives all of the securities lending income to its funds. DFA like other fund shops only gives its funds the legally required 50% of the lending income.
[edit: corrected my error]
Last edited by grok87 on Sat Sep 16, 2017 5:11 am, edited 1 time in total.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

lack_ey
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Re: Securities lending revenue: DFA vs vanguard.

Post by lack_ey » Wed Sep 13, 2017 7:13 pm

grok87 wrote:
Wed Sep 13, 2017 6:59 pm
remember Vanguard gives all of the securities lending income to its funds. DFA like other fund shops only gives its funds the legally required 50% of the lending income.
First of all, a number of fund companies return 100% to the funds. Vanguard is hardly the only one. DFA does as well. These days the iShares ETFs and some SPDRs are about at 70% to the fund, while Schwab ETFs are 100%. I previously saw WisdomTree give 70% to the fund while Invesco PowerShares returns 100% as well. I don't know where to find the information as quickly for mutual funds, but I do remember some other fund families are at 100% (I see searching a previous post that I previously wrote that T. Rowe Price also does 100%) and most I think are above 50%. In general I think this can differ on a fund-by-fund basis, so don't take the above as 100% true.


As to the main question, DFA is relatively aggressive with securities lending, while Vanguard is relatively conservative (as usual) with securities lending. This old column gives some figures for DFA and Vanguard funds:
https://www.cbsnews.com/news/how-securi ... s-returns/

You can look it up in the annual reports. In most cases DFA's riskier securities lending will not by itself cover the difference in expense ratios with Vanguard funds in the same category.

psteinx
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Re: Securities lending revenue: DFA vs vanguard.

Post by psteinx » Wed Sep 13, 2017 7:27 pm

Research below,
TLDR version (See details, caveats, etc below)
DFA about 0.06% in most recent year
Vanguard about 0.04% in most recent year

------ Details Below -------

OK, so I was inspired to research.

You can find mutual fund annual reports and such at SEC.GOV, company filings, then change the selector tool on the left to "Mutual Funds".

DFA US Small Cap Value here: https://www.sec.gov/cgi-bin/browse-edga ... s&count=40

Vanguard here: https://www.sec.gov/cgi-bin/browse-edga ... cd=filings

Then look for the latest N-CSR (annual report).

Unfortunately, both of them group multiple funds in a single N-CSR, so searching out the information you want for a particular fund can be tedious (DFA's in particular is very tough to peruse).

That said, in the DFA one, if you search for "securities lending", you should be able to dig your way through to the right information.

For DFA, this is for the year ending 10/31/2016
For Vanguard, for the year ending 12/31/2016
(i.e. slightly different periods, but they're both annual reports, so this should be a comparitively minor issue).

Caveat: It's possible I've read something wrong, searched for the wrong thing, transcribed something wrong, etc., so take this with a grain of salt. But I *think* I've got it basically right

DFA US Small Cap Value:
Securities lending income: $8445K
Ttl fund size at annual report year end: $14485540K
Approx Securities Lending Income, as annual %: 0.06%

Vanguard Small Cap Value Index:
Securities lending income: $9671K
Ttl fund size at annual report year end: $24750316K
Approx Securities Lending Income, as annual %: 0.04%

jackal
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Re: Securities lending revenue: DFA vs vanguard.

Post by jackal » Wed Sep 13, 2017 9:04 pm

Trying to see if, after controlling for factor weights, there is any advantage of dfa that justifies the higher expense ratio. Even without the advisor fee, seems like vanguard is better in the US if one is targeting factor weights of 0.4 or less. Anyone know if the profitability and momentum screens add enough value to justify the higher ER? Outside US though, dfa seems better right? (Better in the sense of tilting)

psteinx
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Re: Securities lending revenue: DFA vs vanguard.

Post by psteinx » Thu Sep 14, 2017 10:12 am

Note that, (in my opinion anyways) even if DFA US small value did have a much larger advantage in securities lending income, it's not clear that would be a strong mark in its favor. There are two significant issues with this income, in my mind.

1) Some of it may be offsetting lower expected returns from the securities in question. i.e. A stock for which the borrow fee is high may have poorer expected returns (at least, before accounting for securities lending income) than a similar stock without a high borrow fee.

2) There is likely some small credit risk associated with securities lending. Yes, I assume there is collateral, etc. But in, say, a market meltdown, is there some possibility of something going wrong? I'd guess yes. This may be pretty small, and I don't recall seeing this being an issue in 2008-9 (though its possible something slipped under my radar, anyways, in that timeframe).

As for the more general issue of DFA vs. Vanguard, and tilting vs. not, well, that's been discussed many times on this forum. You can search for previous discussions...

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whodidntante
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Re: Securities lending revenue: DFA vs vanguard.

Post by whodidntante » Thu Sep 14, 2017 10:13 am

sport wrote:
Wed Sep 13, 2017 4:03 pm
If you look at funds in both companies that track the same index, you should get an answer to your question.
DFA funds are not index funds.

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whodidntante
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Re: Securities lending revenue: DFA vs vanguard.

Post by whodidntante » Thu Sep 14, 2017 10:24 am

jackal wrote:
Wed Sep 13, 2017 9:04 pm
Trying to see if, after controlling for factor weights, there is any advantage of dfa that justifies the higher expense ratio. Even without the advisor fee, seems like vanguard is better in the US if one is targeting factor weights of 0.4 or less. Anyone know if the profitability and momentum screens add enough value to justify the higher ER? Outside US though, dfa seems better right? (Better in the sense of tilting)
Don't forget patient trading and providing liquidity.

DFA is quite good at what they do, and I think some of their funds add value after expenses. Vanguard factor funds are built for the masses and to have more room to run before facing capacity issues. I'm not going to pay an advisor 1% AUM to get DFA access, but if the ER is the only factor I would pick DFA for small and value exposure.

jackal
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Re: Securities lending revenue: DFA vs vanguard.

Post by jackal » Thu Sep 14, 2017 12:32 pm

whodidntante wrote:
Thu Sep 14, 2017 10:24 am
jackal wrote:
Wed Sep 13, 2017 9:04 pm
Trying to see if, after controlling for factor weights, there is any advantage of dfa that justifies the higher expense ratio. Even without the advisor fee, seems like vanguard is better in the US if one is targeting factor weights of 0.4 or less. Anyone know if the profitability and momentum screens add enough value to justify the higher ER? Outside US though, dfa seems better right? (Better in the sense of tilting)
Don't forget patient trading and providing liquidity.

DFA is quite good at what they do, and I think some of their funds add value after expenses. Vanguard factor funds are built for the masses and to have more room to run before facing capacity issues. I'm not going to pay an advisor 1% AUM to get DFA access, but if the ER is the only factor I would pick DFA for small and value exposure.
What do you mean by "providing liquidity"? I thought both vanguard and dfa were fairly liquid...

jackal
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Re: Securities lending revenue: DFA vs vanguard.

Post by jackal » Thu Sep 14, 2017 12:40 pm

whodidntante wrote:
Thu Sep 14, 2017 10:13 am
sport wrote:
Wed Sep 13, 2017 4:03 pm
If you look at funds in both companies that track the same index, you should get an answer to your question.
DFA funds are not index funds.
In a sense, I feel they are index funds but instead of using a commercial index, they use a "home designed" index.
I believe in tilting for the long run. As an example, one have build a portfolio with factor weights of 0.3 and 0.3 size/ value with both dfa and vanguard.

For instance: 75% core 2 and 25% dtmvx would be similar to 75% vbr and 25%vanguard total stock market index. Prior to incorporation of momentum/ profitability etc, vanguard is cheaper. Not sure if the other benefits outweigh expenses. Can't use historical data since these are fairly new incorporations even in dfa.

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triceratop
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Re: Securities lending revenue: DFA vs vanguard.

Post by triceratop » Thu Sep 14, 2017 12:50 pm

jackal wrote:
Thu Sep 14, 2017 12:40 pm
whodidntante wrote:
Thu Sep 14, 2017 10:13 am
sport wrote:
Wed Sep 13, 2017 4:03 pm
If you look at funds in both companies that track the same index, you should get an answer to your question.
DFA funds are not index funds.
In a sense, I feel they are index funds but instead of using a commercial index, they use a "home designed" index.
I believe in tilting for the long run. As an example, one have build a portfolio with factor weights of 0.3 and 0.3 size/ value with both dfa and vanguard.

For instance: 75% core 2 and 25% dtmvx would be similar to 75% vbr and 25%vanguard total stock market index. Prior to incorporation of momentum/ profitability etc, vanguard is cheaper. Not sure if the other benefits outweigh expenses. Can't use historical data since these are fairly new incorporations even in dfa.
Matt Levine has a good take on fake indexing:
But making a list of companies that you think are good investments, and then buying the stocks on that list, is usually called "active management," as distinct from "indexing," which is just taking someone else's list of companies and buying all the stocks on that list. The investment process of the Pax Ellevate Global Women's Index Fund -- make a list of companies that are good for women, and then invest in those companies -- sounds a lot like the investment process of the Pax World Global Women's Equality Fund. Only the name has changed.

Pax is not alone: "Index fund" creep has been going on for a while now, with "smart indexes" and "custom indexes" and "improved indexes" and "fundamental indexes" and other things that are active management but that are called index funds. From an investor's perspective, 6 this fund seems to offer some of the key disadvantages of an actively managed fund: high management fees to pay for all that research, 7 and the possibility of, you know, not beating the market. But it also has some of the key disadvantages of an index fund: The index is market-cap weighted, so Pax Ellevate can't overweight stocks that it thinks are particularly undervalued, 8 and it adjusts only once a year, so Pax Ellevate can't respond quickly to changing conditions. (In fact, Pax Ellevate is required to publish the list of changes to the index before it can change its investments, so it can easily be front-run. 9 )

If you were just an investor with the investing thesis that companies that empower and promote women are good investments, the right investing decision would be to just buy the stocks of those companies, weighted by how much they empower women and how good an investment you think they are, without giving away too much about your investment-decision secret sauce. That seems to have been the strategy of the Pax World Gobal Women's Equality Fund, and it worked okay. 10

On the other hand, if you wanted to promote this investing thesis -- to get investors for your fund, or to advocate for the empowerment and promotion of women in business, or both -- calling it an "index fund" has a certain appeal. Index funds are hot right now, so investors who wouldn't buy a Women's Equality Fund might be thrilled to buy, or at least pay attention to, a Women's Index Fund. And calling it an index, and publishing the names in advance, might encourage other investors to copy your investing strategy, or compare themselves to it. That, in turn, might make companies want to be in the index, which might encourage them to treat women fairly. As an investment in women, if not as an investment in stocks, calling this an index fund makes sense.
Krawcheck Proves Everything's an Index Fund Now -- Eventually managers will be managing to the MSCI Index of Companies That I'm Thinking About but Haven't Mentioned to Anyone.

I agree with whodidntante that the correct perspective on DFA funds is as passive, non-index products. They also have explicitly stated that they follow trading strategies which are inconsistent with following any index tracking, internal or external.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

lack_ey
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Re: Securities lending revenue: DFA vs vanguard.

Post by lack_ey » Thu Sep 14, 2017 1:12 pm

jackal wrote:
Thu Sep 14, 2017 12:32 pm
whodidntante wrote:
Thu Sep 14, 2017 10:24 am
Don't forget patient trading and providing liquidity.

DFA is quite good at what they do, and I think some of their funds add value after expenses. Vanguard factor funds are built for the masses and to have more room to run before facing capacity issues. I'm not going to pay an advisor 1% AUM to get DFA access, but if the ER is the only factor I would pick DFA for small and value exposure.
What do you mean by "providing liquidity"? I thought both vanguard and dfa were fairly liquid...
Generally at any given point in time there is more interest in selling a stock than buying a stock, or vice versa. If there's more demand on one side, then naturally the orders compete with each other, and there is a need for parties to take the other side. Those taking that other side can be said to be providing liquidity to the market (and being with the crowd would be taking liquidity). Usually the side providing liquidity can get better pricing relative to what you'd expect if demand were more evenly matched.

If a fund doesn't have much opinion on relative forward return of different components within a fund at any given point in time, like DFA might, then part of trading patiently would include waiting to transact when they can be liquidity providers. Or at least, not buying when everyone else wants to buy or selling when the crowd is selling either.

Likewise this should increase alpha relative to caring less about transaction costs. But many index funds are smarter about trading these days and seek to reduce costs there. DFA does have an advantage in the fact that they're not following an index, so there are not discrete events where others know to look for a shift in portfolio holdings, and they don't have to balance trading costs with index tracking error (or at least they care less about tracking error). The actual index funds also have a mandate to track the index, in addition to keeping costs down, which means adjusting the portfolio promptly to match the index.

DFA in any given period of time could be adding or subtracting alpha based on how the inclusion screens went and so on. This part can be pretty random though we think additive on average.

Generally you should expect alpha for these kinds of funds to fluctuate over time, as it's fairly random which securities will do better in any given period. Any time you slice the market differently, you'll end up with some different characteristics, which can add or detract from performance relative to whatever benchmark you're looking at. I wouldn't read too much into the numbers.

grok87
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Re: Securities lending revenue: DFA vs vanguard.

Post by grok87 » Sat Sep 16, 2017 5:10 am

lack_ey wrote:
Wed Sep 13, 2017 7:13 pm
grok87 wrote:
Wed Sep 13, 2017 6:59 pm
remember Vanguard gives all of the securities lending income to its funds. DFA like other fund shops only gives its funds the legally required 50% of the lending income.
First of all, a number of fund companies return 100% to the funds. Vanguard is hardly the only one. DFA does as well. These days the iShares ETFs and some SPDRs are about at 70% to the fund, while Schwab ETFs are 100%. I previously saw WisdomTree give 70% to the fund while Invesco PowerShares returns 100% as well. I don't know where to find the information as quickly for mutual funds, but I do remember some other fund families are at 100% (I see searching a previous post that I previously wrote that T. Rowe Price also does 100%) and most I think are above 50%. In general I think this can differ on a fund-by-fund basis, so don't take the above as 100% true.


As to the main question, DFA is relatively aggressive with securities lending, while Vanguard is relatively conservative (as usual) with securities lending. This old column gives some figures for DFA and Vanguard funds:
https://www.cbsnews.com/news/how-securi ... s-returns/

You can look it up in the annual reports. In most cases DFA's riskier securities lending will not by itself cover the difference in expense ratios with Vanguard funds in the same category.
thanks for the correction. Looks like i was wrong. This source also states that DFA returns 100% of securities lending income to their funds
https://www.advisorperspectives.com/new ... _Funds.pdf
wrote:While many fund companies take a portion of securities lending revenue for themselves (as opposed to crediting it into the fund), 100% of DFA’s securities lending revenue goes back into the fund to benefit investors.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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