Are DFA funds becoming irrelevant?

[Nords]

To a certain subset of passive investors, DFA funds used to be the only way to get "proper" exposure to small-cap and microcap stocks. If you were going to slice & dice a portfolio, DFA was the best & cheapest carving knife.

Unfortunately they zealously protect their brand by setting a high bar for financial advisers and by making themselves only available through them. This has spawned a cottage industry of analysts & investors attempting to reproduce DFA funds without getting into a legal hassle.

Now a MarketWatch writer is claiming that ETFs have replicated DFA funds, presumably at a lower expense than you'd pay to an adviser:
ETFs challenge another index-fund icon - MarketWatch

DFA Funds are great. Their small and micro cap funds DFA U.S. 9-10 Small Company Portfolio (USFSCX) , The DFA U.S. Small Company Portfolio (USFSTX) and DFA U.S. Small Cap Value Portfolio (USFSVX) have made investors about 10% yearly, compounded for about 20 years.
But low-cost ETFs now occupy every asset category offered by DFA. Investors who felt locked into a DFA set of products, are now able to build their own portfolios without going to a DFA adviser.
Moreover, DFA doesn’t always win in every asset class. Over the last five years in emerging markets equities, for example Vanguard MSCI Emerging Markets ETF (US:VWO) has outperformed DFA’s Emerging Markets Portfolio (USFEMX). DFA U.S. Small Cap Value has strong competition from iShares SmallCap 600 Value Index Fund (US:IJS).

Have any of you tried to replicate your own asset allocation with ETFs instead of with DFA funds?

(P.S.: If you're going to list a ticker that includes a colon followed by the capital letter "D", then check the "Disable smilies in text" box in "Miscellaneous Options" of the "Additional Options" of the post software...)

 

[Brett_Cameron]

...
(P.S.: If you're going to list a ticker that includes a colon followed by the capital letter "D", then check the "Disable smilies in text" box in "Miscellaneous Options" of the "Additional Options" of the post software...)

Operating experience.

 

[LOL!]

I am pleased with my "reverse-engineered" DFA-style portfolio without using DFA funds.

What I did:

Take a few DFA portfolios (see some at Index Funds - DFA Advisors - DFA Funds - Dimensional Fund Advisors Approved ) or funds (e.g. DGSIX) and run a Morningstar X-ray on them. From the M* X-ray, I get the percent US stock, percent Foreign stock, percent bond, the 9-box style grid, and the Average Market cap. These are the numbers to try to mimic. I know others have tried to calculate BtM and HmL or whatever the Fama & French are using, but that was too much work.

Next, take the index funds available to me in my retirement plans, plus any ETF or funds in taxable accounts and build up a portfolio with similar numbers to the DFA-derived numbers. In particular make sure Large-cap row sums to about 50% and make sure the Value column is around 40% or more.

Finally, track the portfolio XIRR() versus 2 benchmarks: an IFA (DFA) portfolio of the same fixed income percentage and a Vanguard Target Retirement portfolio of the same fixed income percentage.

I will say that one cannot let such a portfolio be just "buy-and-hold". One definitely has to "buy, hold, and rebalance" instead along with tax-loss harvesting. I always ask folks: "Did you rebalance in March 2009 by exchanging bonds for equities?" Many folks will say they "held on" and didn't sell equities, but that is not quite the same as "exchanging from bonds to equities" at the peak of fear.

Also a mistake that many writers and comparers make is to say the Vanguard Small Cap Value is equivalent to DFA Small-cap value. That is not true. One needs a higher percentage of Vanguard SCV to get the numbers in the 9-box style grid to where they might mimic a DFA portfolio. In other words, one cannot take the same percentages of funds with similar names. If one does that, they will end up with a much higher average market cap for their portfolio than a DFA portfolio.

Finally, I must say that "Value" has not been doing well compared to "Blend" and "Growth" the past few years, so it has not been as hard to beat a DFA portfolio than it might have been in the past when small-cap and value were really ascendant.

PS: I don't think you need microcap stocks in your portfolio.

 

[FinanceDude]

Have any of you tried to replicate your own asset allocation with ETFs instead of with DFA funds?

Yes, it's my primary investment avenue for clients........

 

[ziggy29]

Have any of you tried to replicate your own asset allocation with ETFs instead of with DFA funds?

I'm using ETFs more and more, especially since through Schwab, Vanguard and Fidelity you can now trade a fair number of ETFs with no commissions. That levels the playing field with traditional mutual funds in terms of being able to make periodic purchases and rebalance. It didn't used to make sense using ETFs to buy (say) $500 a month into a fund when you paid $10 or more for the trade and immediately ate the equivalent of a 2% (or higher) front-end load.

 

[pb4uski]

Not to hijack the thread, but I am mostly in VG Admiral shares (mostly Total Stock Index, Total International Index and Total Bond Index) and the ERs are the same as the cousin ETFs and I rebalance only once or twice a year so I don't see any advantage to me of ETFs vs funds. Am I missing something?

 

[LOL!]

.... Am I missing something?

Sure:

1. The excitement of intraday stock quotes for your ETFs.
2. The decision of whether to use a limit order or a market order.
3. Worrying about the bid/ask spreads.
4. ... and some positive things that probably you don't care about.

 

[youbet]

Sure:

1. The excitement of intraday stock quotes for your ETFs.
2. The decision of whether to use a limit order or a market order.
3. Worrying about the bid/ask spreads.

While I'm still more heavily invested in MF's than ETF's, I'm being drawn toward ETF's by these features.

 

[Nords]

Not to hijack the thread, but I am mostly in VG Admiral shares (mostly Total Stock Index, Total International Index and Total Bond Index) and the ERs are the same as the cousin ETFs and I rebalance only once or twice a year so I don't see any advantage to me of ETFs vs funds. Am I missing something?

Sure:
1. The excitement of intraday stock quotes for your ETFs.
2. The decision of whether to use a limit order or a market order.
3. Worrying about the bid/ask spreads.
4. ... and some positive things that probably you don't care about.

4a. The ability to sell put & call options on the ETF shares.

 

[pb4uski]

Thanks. Seems to me I am not missing much.

 

[Steelart99]

Not to hijack the thread, but I am mostly in VG Admiral shares (mostly Total Stock Index, Total International Index and Total Bond Index) and the ERs are the same as the cousin ETFs and I rebalance only once or twice a year so I don't see any advantage to me of ETFs vs funds. Am I missing something?

I'm absolutely new to taking true control of my investments. I've made lots of errors (... big losses) due to basic ignorance and chasing the markets . That said, I really don't want to spend lots of time tracking and micro-managing my investments. I'm planning my ER for about 5 years out and was looking at the VG Admiral shares you noted; or one of the VG Targeted Retirement funds which have a mix of the same funds you noted. Is this a reasonable way to be properly diversified? Or, should I be looking at dividend paying stocks? While I'm a reasonably intelligent guy, I'm still confused with all the variables and options for investing.

I know there is no golden bullet and that "everyone is different" ... just looking for some basic pluses/minuses for the various "styles" of investing.

 

[nun]

I'm planning my ER for about 5 years out and was looking at the VG Admiral shares you noted; or one of the VG Targeted Retirement funds which have a mix of the same funds you noted. Is this a reasonable way to be properly diversified? Or, should I be looking at dividend paying stocks? While I'm a reasonably intelligent guy, I'm still confused with all the variables and options for investing.

Often you "can't see the wood for the trees" when it comes to investing; there's just so much choice and too many variables. Slicing and dicing always struck me as just to much trouble and I never considered DFA because of the need to do it through a financial advisor. So a long time ago I decided to:

1) use broad index funds;
2) keep one or two years of expenses in cash or short term bonds;
3) have a 50/50 (equity/bonds and cash) asset allocation and rebalance when it diverges by 10%, so when it gets to say 45/55;
4) use total stock market and total bond indexes and add some dividend funds and corporate bonds for income with something like Wellesley.

 

[FinanceDude]

Well, if $208 billion under management makes them irrelevant, a whole bunch of other companies are irrelevant too...........

 

[FinanceDude]

Often you "can't see the wood for the trees" when it comes to investing; there's just so much choice and too many variables. Slicing and dicing always struck me as just to much trouble and I never considered DFA because of the need to do it through a financial advisor.

Most DFA advisors have minimums of $200,000 or more, so they would be out of reach of many investors Vanguard is happy to take. They are not interested in the $200/month DCA business.

Many on this board could meet those minimums, but it is a sticking point for most in America..........

 

[urn2bfree]

I am not sure whether DFA funds are "worth it" over Do it Yourself-- no one can know for sure...those DFA guys are pretty smart--much smarter than I am-(U of Chicago is tough to beat for math or economics)--but what is for certain is that if you decide to put your "stock" in DFA you are unlikely to come out ahead UNLESS you are also with a low cost DFA approved FINANCIAL ADVISOR... and they are not all low cost.
this Low-cost, fixed-fee DFA investment advisors
summarizes the range of fees one might end up paying to the ADVISOR just for the privelege of using DFA...Some who have no experience with DFA assume incorrectly that a great fund family like DFA funds that require an Advisor must also have high expenses or loads--the funds do not--they are NO LOAD and they run low expenses and they are often structured to minimize generation of taxable gains-while maintaining a good track record overall for portfolio growth.
DFA argues that limiting access by requiring an advisor keeps stability in their funds and their track record supports them...BUT if you get DFA from an expensive advisor- particularly one whose fees rise with your portfolio size (especially above $1 million)-it cannot be expected to be worth it or "relevant." Low cost DFA approved advisors exist (examples=-Cardiff, Evanson, and even a % of Assets Under management charger like Portfolio Solutions if your portfolio stays under $2M)

 

[pb4uski]

I'm absolutely new to taking true control of my investments. I've made lots of errors (... big losses) due to basic ignorance and chasing the markets . That said, I really don't want to spend lots of time tracking and micro-managing my investments. I'm planning my ER for about 5 years out and was looking at the VG Admiral shares you noted; or one of the VG Targeted Retirement funds which have a mix of the same funds you noted. Is this a reasonable way to be properly diversified? Or, should I be looking at dividend paying stocks? While I'm a reasonably intelligent guy, I'm still confused with all the variables and options for investing.

I know there is no golden bullet and that "everyone is different" ... just looking for some basic pluses/minuses for the various "styles" of investing.

If you are looking for something really simple, then Vanguard Star, Wellesley, Wellington and their target date funds on the index side are tough to beat IMO. You could look them over and just pick those that have an AA objective similar to what you want.