Comments on my DFA/IFA-100 portfolio clone

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CRTR
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Comments on my DFA/IFA-100 portfolio clone

Post by CRTR » Wed Oct 04, 2017 11:20 pm

I posted this under another topic. Got a PM recommending that I start a new topic with it . . . so here it is . . .

Well, I was off work today and bored . . . . . So, I decided to give a go at duplicating a well-known DFA based portfolio using VANGUARD and other available ETFs. I attempted to match each component of the old IFA 100/DFA portfolio using ETFs with similar Morningstar portfolio analytics and 10 year correlations (if possible) greater than 95%. Rebalancing was performed annually. I ran the two portfolios through Morningstar and posted a PDF of the result.

As can be seen, the IFA portfolio can be "cloned" easily. The correlation coefficient between the two portfolios is 99% since inception of the newest ETFs (1/2010). Not surprisingly, overall performance, alpha, beta and sharpe ratio of the two are matched as well. Though i would like to see longer than a 7 year run, given the statistical match of the two portfolios, no reason to think things will not continue similarly as time goes on. If you look at the performance graph in the pdf link, the two portfolios track each other almost exactly.

Of note, this exercise does NOT include trading costs or the advisor fees required to access DFA funds. Transaction costs, of course, would be higher for the DFA portfolio due to higher mutual fund trading costs vs ETFs. If one were to subtract the IFA 0.9% AUM fee, the clone's performance would trounce the DFA mix as well. Given that ANYONE can easily create this cloned portfolio, it's hard for me to justify IFA's fee structure. As there are a number of free or ridiculously cheap ETF trading options out there, the pro-IFA argument becomes even weaker.

https://drive.google.com/file/d/0B1ll8a ... sp=sharing

Old IFA100 Clone
DFUSX 12% VV
DFLVX 12 VTV
DFSCX 20 IJR 10%, BRSIX 10%
DFSVX 20 IJS
DFGEX 5 RWO
DFIVX 6 DWM
DFISX 6 SCHC
DISVX 6 DLS
DFEX 4 SCHE
DFEVX 4 DEM
DEMSX 5 DGS

As always, I welcome any thoughtful comments/criticisms/etc.
Last edited by CRTR on Wed Oct 04, 2017 11:50 pm, edited 2 times in total.

livesoft
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Re: Comments on my DFA/IFA-100 portfolio clone

Post by livesoft » Wed Oct 04, 2017 11:29 pm

So this is a 100% equity portfolio and at least for 2017 YTD has trailed a total market weight benchmark performance by about 4%, right? One might call this a huge tracking error.

I guess I wouldn't want a small-cap and value-tilted portfolio unless it does at least as well as a total market weighted portfolio.
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CRTR
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Re: Comments on my DFA/IFA-100 portfolio clone

Post by CRTR » Wed Oct 04, 2017 11:47 pm

livesoft wrote:
Wed Oct 04, 2017 11:29 pm
So this is a 100% equity portfolio and at least for 2017 YTD has trailed a total market weight benchmark performance by about 4%, right? One might call this a huge tracking error.

I guess I wouldn't want a small-cap and value-tilted portfolio unless it does at least as well as a total market weighted portfolio.

Thanks for reading and taking the time to respond. Sorry, I'm not sure I completely understand your point . . . . .You are absolutely correct. It has trailed the ACWI benchmark this year, so far. On the other hand, it has outperformed it handily over the past 7 year . . . . taken further, using the long term returns data from the IFA site, the IFA100 has slaughtered it on a long term basis. Not sure we can call such performance differences "tracking errors" because their portfolio was not meant to track a market weighted, all country portfolio but to beat it. Relative to a total market weighted portfolio, it is significantly over-weighted in small cap and value tilted in domestic, developed and emerging markets. That type of asset allocation, of course, is the investment philosophy behind all DFA and IFA portfolios.

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triceratop
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Re: Comments on my DFA/IFA-100 portfolio clone

Post by triceratop » Thu Oct 05, 2017 12:55 am

livesoft wrote:
Wed Oct 04, 2017 11:29 pm
So this is a 100% equity portfolio and at least for 2017 YTD has trailed a total market weight benchmark performance by about 4%, right? One might call this a huge tracking error.

I guess I wouldn't want a small-cap and value-tilted portfolio unless it does at least as well as a total market weighted portfolio.
Is this a serious livesoft comment? Who said a portfolio with superior expected returns has to perform over an arbitrary 9 month period?

Hey, in 2008 a total market equity portfolio underperformed a global allocation (stocks and bonds and real estate). I don't see why anyone would want an equity tilted portfolio unless it does as well as a global allocation portfolio.
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livesoft
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Re: Comments on my DFA/IFA-100 portfolio clone

Post by livesoft » Thu Oct 05, 2017 5:29 am

I think we all agree that one can mimic an IFA / DFA portfolio without using DFA funds. This has been shown by a few discussions on the forum.

@CRTR, the following thread has links to IFA / DFA videos about Managing Expectations which are worthwhile viewing [again if you have already viewed them]: viewtopic.php?t=205911 The videos do describe underperformance of this style portfolio at various times and time ranges.

Another related thread is the Trev H Ultimate / Simplified one:
viewtopic.php?t=38374 This is my hint that your clone has way too many investments in it.

@triceratop, even you have reported that your small-cap and value-tilted portfolio has done about 17% YTD and you have some fixed income in it, too. So maybe one can have a small-cap and value-tilted portfolio without falling too far behind a total market weighted portfolio?
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triceratop
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Re: Comments on my DFA/IFA-100 portfolio clone

Post by triceratop » Thu Oct 05, 2017 10:31 am

Fair enough, benchmark of 90/10 VT/VGIT would have returned 16.00% thru 09/30, so actually doing quite well with an outperformance of 1.50%. But I attribute much of that to timing of purchases well, and EM.

OP, small and value and EM haven't done that poorly that your portfolio should track this poorly YTD. You should be able to use 2 funds for US small and value tilting, and at most 4-5 for international (and you can do quite well with 3)
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heyyou
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Re: Comments on my DFA/IFA-100 portfolio clone

Post by heyyou » Thu Oct 05, 2017 11:36 am

Thank you to the OP for taking the time to clone the IFA allocation using lower cost funds.

Just to twist the tiger's tail: If an advisor is going to charge a fee that is a noticeable fraction of the long term portfolio return, said advisor should have a complicated allocation in order to impress the naive customers. That is the dark side of capitalism and advertising, the customer is also free to choose a more expensive choice, whether it is better or not, regardless of the opinions of others who may be more knowledgeable.

As livesoft posted, Trev H's four fund Ultimate Buy and Hold allocation using Vanguard funds (25% each LB, SCV, ILV, ISB) also covers the territory well enough to have similar returns at much lower cost. DFA funds and the ETF clones both have more precise coverage of each slice, but VG funds' broader coverages (i.e. VG's SCV fund having significant mid-cap businesses in it) is an advantage to the entire portfolio. That imprecision also reduces turnover and fund expenses.

Our goals are to have portfolios that are good enough to fund a comfortable retirement if we save diligently. There is a spectrum of allocations that are all good enough, some simple, and some more expensive. Consider how much site memory would be saved here if we BHs did not argue so often about which allocation suits each of us best.

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