Disaster at DFA

For over five years, this website has warned readers to avoid DFA funds and invest in Vanguard instead. We’ve pointed out the relatively high fees, poor performance, high risk, lower diversification, and less tax efficient nature of DFA versus Vanguard.

Hopefully you were paying attention in 2018, and dumped your DFA holdings before 2019 began – because failing to switch would have cost you a large amount of money.

Let’s look at the results for 2019. We’ll compare three funds:

Fund Symbol Strategy
Vanguard Total US Market VTSAX Total US stock market, market cap weighted.
DFA Vector Equity DFVEX Total US stock market, small/value weighted.
DFA Small Value DFSVX Small/value stocks only.

And here are the 2019 results:

Capturedfa14

The Vanguard fund rose 30.4% in 2019, the Vector Equity fund 25.7%, and the small value fund 17.8%. (this site measures returns through Dec 30, since that’s the date DFA’s Vector Equity and other total US stock market funds were created). Looked at another way, here are the gains on a $500k investment in each fund in 2019:

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That’s a stunning difference when you consider all three funds track the same asset class (stocks) in the same country. This, year, I’ve given DFA a break and not tacked on the 1% fee most investors have to pay their friendly DFA advisors for the privilege of owning these “elite” funds.

Note that the DFA Small Value fund isn’t directly comparable to the Vanguard fund, since it doesn’t cover the entire stock market. But DFVEX, which is a total US Stock market fund, is.

Critics will note that this is just one year – too short a period to draw any conclusions about the superiority of one fund versus another.  And so, once again, let’s show the complete, 14 year history of Vanguard vs DFA, since the DFA fund’s inception in 2005:

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Vanguard’s experienced 248.2% growth, versus 187.8% for DFA. Happy birthday, DFVEX. Here’s how that looks in dollar terms (once again I’ve assumed no DFA advisor fee):

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To be clear, the Vanguard fund simply represents all stocks in the US market, weighted by the size of each company. Investors pay DFA to outperform that passive index.

Once again this year, DFA company owners and their network of salespeople made a lot of money. And, once again, DFA investors underperformed.

A new year is upon us. Which company will you choose in 2020?

 

Judging DFA’s “value” marketing angle with 20 years of real world data

Since 1993, the cornerstone of DFA’s marketing strategy has been that “small” and “value” stocks offer superior returns for investors. This was based on historical data compiled by two academics, Eugene Fama and Kenneth French, who were soon on the DFA payroll.

The Fama/French data showed not only that value stocks outperformed growth, but that small growth stocks were especially bad. As DFA advisor William J. Bernstein wrote in 2002:

But the larger point is simply not to buy small growth funds at all—this is a miserable asset class, with long-term historical returns lower than all other market segments.

DFA advisors such as Larry Swedroe, and others made similar claims, with Swedroe declaring small growth stocks the Black Hole of Investing. Ouch.

There was just one problem: the Fama/French data had little relationship to real world mutual funds. Much of its supposed “small value premium” came from a few, tiny, illiquid stocks that no mutual fund could own. It also assumed holdings could be bought and sold with no transaction costs, which only happens in academic papers and marketing brochures.

Could the “small value premium” be realized in reality? And was avoiding small growth stocks a valid strategy?

In 1998, Vanguard decided to find out. It launched two index funds: one Small Growth (VISGX), one Small Value (VISVX). These were the first small value and growth index funds.

We now have 20 years of data from each of these products. We’ve been able to track them through two economic cycles, including the recessions of 2002 and 2009. The results (total return, source: Morningstar):

visvx_visgx2

After 20 years, Vanguard’s Small Value fund returned 488%, versus 572% for Small Growth. Not exactly the “black hole” the DFA data predicted.

DFA advisors continue to market based on Fama/French data, as if these questionable historical results have any real world significance. If the data above isn’t enough to discredit it, I don’t know what is.

DFA: 13 Years of Underperformance

Birthday wishes are in order for Dimensional Fund Advisors’ all-in-one “Core Equity” mutual funds, which recently turned 13.  It’s an awkward age, filled with heartaches and insecurity. How popular am I? Where do I fit in?

These underperforming youths, alas, are unlikely to ever date cheerleaders or find themselves voted Most Likely To Succeed.

A quick recap: Until 2005, DFA offered an ever-expanding hodge-podge of funds that covered only slices of the stock market. They started with small cap funds in 1981, and, when those underperformed, switched to so called “three factor” portfolios (overweighting small and value stocks) in the 1990s.

This revolving lineup of products made for great marketing – if a fund covering one bit of the market outperformed, as random chance would dictate, DFA highlighted those with customers, ignoring the laggards. Or they simply started new funds, making trails of poor performance disappear.

In 2005, however, DFA began offering a lineup of “Core Equity” funds that covered the entire market. Sales brochures from the time sold them as:

The result of decades of experience, integrated portfolios that deliver broad diversification and low-friction factor exposures—the synthesis of Dimensional’s investment philosophy.

Since these funds were meant to be the only US stock fund an investor needed, it was finally possible to compare a single DFA product to the simple total market index fund a Vanguard investor would make.

The three funds they created are detailed below:

Fund Symbol Strategy
DFA US Core Equity 1 DFEOX Modest small/value concentrations
DFA US Core Equity 2 DFQTX Greater tilt toward small and value stocks
DFA US Vector Equity DFVEX Heavy DFA magic

This blog has focused on DFVEX, which, if DFA really does have a market beating formula, would show the greatest evidence of outperformance.

Here are the results 13 years on. This chart from Morningstar shows the value today of $10,000 invested in both Vanguard’s Total US Market fund (VTSAX), and the DFA Vector fund (DFVEX), on Dec. 30, 2005, the day the DFA fund was incepted:

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Here’s a closeup of the results from the upper left corner of the chart:

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Over 13 years, the DFA Vector fund returned 6.5% per year, annualized. Meanwhile, VTSAX returned 7.7% per year.

Let’s put that 1.2% difference into perspective. Here’s what a $300,000 investment in each fund 13 years ago would be worth today:

Fund Value
DFVEX $681,300
VTSAX $790,230

That’s a loss of $108,930 versus simply holding the market as a whole. Some people call that real money.

But it gets worse: DFA funds aren’t available to purchase directly. Investors must go through financial advisors and pay an additional annual fee for the privilege of the performance above (some people can own them directly through a 401k).

Deducting the standard 1% annual advisory fee, the $300,000 investment above is is now worth only $601,773 – an almost $200,000 drop from what a simple Vanguard fund returned.

Will these ungainly teen-aged funds grow into captains of the football team? Don’t count on it. Global financial markets are far too efficient to allow easy-to-spot free lunches in “factor portfolios”. As we’ve been saying and showing here since 2014, the smart money sticks with Vanguard.