Clyatt, ETFs for Rational Investing Portfiolio?

[REattempt]

Just a thought, maybe Bob will weigh in, but in this thread:

http://www.early-retirement.org/forums/f28/rational-investing-portfolio-bob-clyatt-55634-2.html

Bob commented:

"There are definitely good ETFs and alternatives out since the book was first written in 2005 that make DFA less compelling."

I was wondering:

What are the benefits of the ETFs vs. Vanguard or DFA mutual funds?
What are good ETF funds to use as replacements for the Rational Investing Portfolio recommendations?

Thoughts?

 

[walkinwood]

ETFs sometimes have lower ERs compared to a mutual fund.
DFA requires you to buy through an FA, so there is added cost.
ETFs can be traded anytime through the day, but I don't see that as a benefit.Also, you may pay/get above or below NAV when you buy/sell.
ETFs are structured so the fund manager doesn't necessarily have to sell stock to meet redemptions.

I don't have any input on replacements for the Rational Investing Portfolio.

 

[Nords]

You might want to send a private message to ESRBob to get him to chime in on this thread. I'm not sure how often he checks the board.

I gained the impression from his post that while there aren't necessarily the precise ETF equivalents of DFA's funds, there are lots of ETFs that match various styles of DFA funds. IShares has a huge pile of choices in every sector, cap, and growth/value box.

It might be as easy as using Morningstar's portfolio tools to compare your chosen DFA funds to other ETFs, or to use the top-25 stocks in DFA's funds to find other ETFs with similar holdings.

One reason that Bob may not have pointed out specific funds is because the company that helped him research his portfolios charges him by the question. Besides your possibly being able to do that research for free (or for the cost of a M* premium membership), you'd have a more in-depth understanding of the funds you're picking and how well they suit your asset allocation.

Spouse and I prefer ETFs for the ability to sell covered calls a few times a year. The extra cash is nice but the real benefit of the options is that we're selling the calls on shares that we'd be selling anyway to rebalance.

In the past when we'd get to a rebalancing decision point, there'd always be a tremendous amount of [-]whining dithering[/-] discussion about whether we were really ready to give up that hot asset. Now we just sell the call(s), pocket the money, and wait to see what happens.

 

[REattempt]

Done...

Done....see what we get back.

 

[Nords]

Done....see what we get back.

Might be a bit. His mailing list says he's exhibiting his sculptures at the Berkshires Arts Festival this weekend.

Bob Clyatt Sculpture Home

Bob has definitely figured out what he wants to do all day!

 

[ESRBob]

ReAttempt, Thanks for your inquiry --
Yes I am becoming more and more a fan of ETFs for long term investors -- main reasons not always cited are tax efficiency (no cap gains taxes being thrown off every year by the selling a mutual fund does for redemptions) and second, no penalty for being in the same boat with dummies (when fellow fund-holders panic and sell into disastrous markets, your mutual fund shares take an extra and permanent beating because your fund manager has to sell the collective assets at firesale prices to meet redemptions, leaving the remaining shareholders with less than they would have had in an ETF. In the ETF, redemptions are just shares sold on the exchanges --taking the fund perhaps to a discount-- but you'd still have the same number of underlying assets in your ETF share. If a market maker wants to permanently redeem shares, take it out of circulation, they literally hand over the ETF shares and receive the component securities, again, leaving remaining ETF shareholders intact.

Obviously ETFs are a tool with risks - (overtrading, buying too-fragmented or too-narrow sector funds, buying actively managed ETFs, and some sense that bond ETFs may not be a great idea) but that need not concern the stalwart long-term investor looking to replace equity index mutual funds.

To the question of replacing DFA funds -- yes there are some good new options out there. At this point I think there is a good fund or ETF replacement for just about every DFA Fund in the Work Less Live More Rational Investing Portfolio:

PFUIX for global fixed income,
DLS for International Small Value, DISVX
VWO for general Emerging Mkts, DFEMX
VSS for International Small,
and a new one, EMGX which I don't own, for DFEVX.
The only thing I can see missing now is Emerging Markets Small (DEMSX) but while a lovely fund it is a tiny part of the overall mix, and stick around and there might just be something there soon, too.

This is a good development because holding DFA funds requires having an advisory relationship with a firm that DFA has blessed, and that involves complexity and an additional fee: not good things in our world.

Hope this helps. The sculpture is going great and the portfolio is holding up. Lets just hope the global profligate (Greeks, US Treasury, Portugese, fill-in-your-favorite deadbeat here) don't take us all down this summer...

 

[LOL!]

Two emerging markets small cap ETFs: EWX and DGS. They are not value tilted, but have reasonable average daily volumes.

EMGX is a non-starter since it has virtually non-existent volume.

 

[ESRBob]

Thx LOL!
Yes the EMGX is new this year and with only a few million in assets it may or may not make it, but we can hope: it tracks DFEVX very nicely. Thx for the EWX and DGS -- with those in place it looks like the final nail is in -- that DFA, while well run of course, is expensive and cumbersome and no longer necessary to achieving a full-fledged slicer/dicer's dream portfolio.

 

[Nords]

This caught my eye while I was looking at our international value ETF (EFV):

Replicating a Dimensional Funds Portfolio - Seeking Alpha

It's not necessarily comparable to (let alone better than) the rational investing portfolio. However the author was able to use M*'s data to replicate a DFA portfolio:

... I decided to see if I could replicate DFA strategies and success utilizing ETFs and found that it was not difficult at all. I started my search by looking for a DFA advisor's recommended moderate portfolio.
Once I found the portfolio, I used Morningstar to determine each of the DFA funds holdings and began comparing those with ETFs in the respective asset class. For almost each fund, I was able to find a comparable ETF that had similar holdings, expenses and performance. Obviously it wasn't a perfect match so I decided to put it into model portfolios to see how my ETF portfolio performed against the DFA portfolio.