Author Topic: DFA funds - are they worth it?  (Read 5192 times)

evme

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DFA funds - are they worth it?
« on: May 24, 2018, 05:06:43 PM »
I have access to DFA funds through my financial adviser, and I'm trying to decide if the added expense ratio is worth it. Some of the DFA emerging market funds have expense ratios of 0.5% - 0.7%, which is quite high.

Comparable funds from Schwab (SCHE or SCHC) have an expense ratio of only 0.13%/0.12%. That's a big difference from DFA's funds.

So, do you think the DFA funds are worth the extra expense? I believe in the past they have often outperformed most index funds even with the extra fees, although haven't been doing as well the past couple years.


Radagast

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Re: DFA funds - are they worth it?
« Reply #1 on: May 24, 2018, 10:36:12 PM »
I have no direct experience. I am skeptical that paying (say) 0.5% to an advisor and then 0.5-0.7% to a fund company will allow any possibility of outperformance. With IUSV and VIOV you can get all your small and value by yourself for about 0.12%. Harder internationally, but good emerging market and international small (FNDE, FNDC, EFV, SCZ, and more especially in vanilla Vanguard funds) are available for 0.4% and less. Saving 0.8% on fund and advisor fees is a gigantic head start.

evme

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Re: DFA funds - are they worth it?
« Reply #2 on: May 25, 2018, 02:25:06 AM »
I have no direct experience. I am skeptical that paying (say) 0.5% to an advisor and then 0.5-0.7% to a fund company will allow any possibility of outperformance. With IUSV and VIOV you can get all your small and value by yourself for about 0.12%. Harder internationally, but good emerging market and international small (FNDE, FNDC, EFV, SCZ, and more especially in vanilla Vanguard funds) are available for 0.4% and less. Saving 0.8% on fund and advisor fees is a gigantic head start.

I hear you. I'm a bit skeptical myself, that's why I'm asking here for more input. It seems counterintuitive to pay more, but at least in some cases the DFA funds seems to significantly outperform it's respective benchmark. Take DISVX for example, quite high expense ratio of 0.68%, however if you look at 3, 5, and 10 year returns it has outperformed by a a pretty decent amount.

http://www.morningstar.com/funds/xnas/disvx/quote.html

Radagast

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Re: DFA funds - are they worth it?
« Reply #3 on: May 25, 2018, 06:37:16 AM »
I have no direct experience. I am skeptical that paying (say) 0.5% to an advisor and then 0.5-0.7% to a fund company will allow any possibility of outperformance. With IUSV and VIOV you can get all your small and value by yourself for about 0.12%. Harder internationally, but good emerging market and international small (FNDE, FNDC, EFV, SCZ, and more especially in vanilla Vanguard funds) are available for 0.4% and less. Saving 0.8% on fund and advisor fees is a gigantic head start.

I hear you. I'm a bit skeptical myself, that's why I'm asking here for more input. It seems counterintuitive to pay more, but at least in some cases the DFA funds seems to significantly outperform it's respective benchmark. Take DISVX for example, quite high expense ratio of 0.68%, however if you look at 3, 5, and 10 year returns it has outperformed by a a pretty decent amount.

http://www.morningstar.com/funds/xnas/disvx/quote.html
Now compare it to SFILX, Schwab's international small value fund and equivalent to FNDC. 0.39% ER and no manager necessary.

MustacheAndaHalf

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Re: DFA funds - are they worth it?
« Reply #4 on: May 25, 2018, 08:53:44 AM »
Larry Swedroe advocates for tilting to small cap and value stocks, and makes comparisons between DFA and Vanguard in his books.  He's a biased source in that he's affiliated with DFA, but you can look at the data in his books and also check online to see that it's accurate.

You mentioned high expense ratios while Radagast mentioned both an expense ratio and adviser fee (of 0.50%).  Are you paying both an advisor fee and higher expense ratios if you invest in DFA?


Radagast

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Re: DFA funds - are they worth it?
« Reply #5 on: May 25, 2018, 12:28:16 PM »
Larry Swedroe advocates for tilting to small cap and value stocks, and makes comparisons between DFA and Vanguard in his books.  He's a biased source in that he's affiliated with DFA, but you can look at the data in his books and also check online to see that it's accurate.

You mentioned high expense ratios while Radagast mentioned both an expense ratio and adviser fee (of 0.50%).  Are you paying both an advisor fee and higher expense ratios if you invest in DFA?
DFA only allows you to invest in their funds through an advisor, not as an individual. Some 401ks and I think the Utah 529 have their funds available, but otherwise there will always be an advisor fee involved. I don't know OP's specifics though, but there was an adviser mentioned.

talltexan

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Re: DFA funds - are they worth it?
« Reply #6 on: May 29, 2018, 02:02:34 PM »
Paul Merriman also advocates for DFA (he discloses that his money is all in their funds), as he recommends some asset classes that aren't very well-covered by Vanguard.

evme

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Re: DFA funds - are they worth it?
« Reply #7 on: May 29, 2018, 03:50:15 PM »
Paul Merriman also advocates for DFA (he discloses that his money is all in their funds), as he recommends some asset classes that aren't very well-covered by Vanguard.

Which asset classes are those?

talltexan

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Re: DFA funds - are they worth it?
« Reply #8 on: May 30, 2018, 06:45:25 AM »
(Just trying to type what I remember from a podcast I listened to long ago)
Small Cap Value
Some international emerging markets types
International REITs

privatefarmer

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Re: DFA funds - are they worth it?
« Reply #9 on: June 01, 2018, 05:11:24 AM »
DFA funds implement something called "security lending" in which they lend out shares to investors who want to short them and collect interest on the loan. This ends up offsetting much of the expense ratio. Larry Swedroe has written a piece about it, just google "DFA security lending swedroe". In general, you can expect anywhere from 0.25%-0.4% in offsetting interest income that goes directly to the investor thus making the expense ratio much more competitive. DFA also uses whats called "patient trading" in that they don't follow a specific index rather they make their own indexes and trade very rarely. This reduces transaction costs and taxation. Overall, I believe that DFA funds are roughly comparable to vanguard or other factor funds as far as costs. And, in the international side, it is very difficult to find cheap factor funds/ETFs so DFA is even more competitive there, IMO. Their track record speaks for itself. If you believe in the factor premiums there simply is no better fund family than DFA. Eugene Fama is even on their board so to me that is enough reason.

Now I found a specific advisor who charges a one-time flat fee for DFA access, so for a large enough portfolio you can get DFA access for very little cost and no ongoing management fee.

privatefarmer

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Re: DFA funds - are they worth it?
« Reply #10 on: June 01, 2018, 05:18:19 AM »
Paul Merriman also advocates for DFA (he discloses that his money is all in their funds), as he recommends some asset classes that aren't very well-covered by Vanguard.

Which asset classes are those?

DFA offers an emerging markets small cap value fund (DEMSX) as well as international SCV (DISVX), vanguard does not. Vanguard does off an international small cap ETF (VSS) however it is not nearly as tilted towards small as DISVX is and is not value oriented. DGS is an ETF offered by wisomtree which is emerging market SCV and would be an alternative to DEMSX.

I think we are splitting hairs. If you want strong factor exposure you can get it w/ IJS for domestic and a combination of VSS/DGS for international. If you aren't 100% small-cap value in your equities anyhow then you really don't need the most "pure" funds that DFA offers. For example, if you only want a part of your portfolio in SCV but are using non-DFA funds then you may just want to allocate more $$$ towards those funds whereas if you use DFA funds you wouldn't need to allocate as much since they are more "pure" SCV.

For myself, I hopefully have 30-40 years to invest and am 100% small cap value spread out across the globe. So I use DFA to get the most "pure" SCV exposure. But if I wanted to mix in large cap/growth then I would switch to easier/cheaper ETFs.

evme

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Re: DFA funds - are they worth it?
« Reply #11 on: June 01, 2018, 03:45:26 PM »
DFA funds implement something called "security lending" in which they lend out shares to investors who want to short them and collect interest on the loan. This ends up offsetting much of the expense ratio. Larry Swedroe has written a piece about it, just google "DFA security lending swedroe". In general, you can expect anywhere from 0.25%-0.4% in offsetting interest income that goes directly to the investor thus making the expense ratio much more competitive. DFA also uses whats called "patient trading" in that they don't follow a specific index rather they make their own indexes and trade very rarely. This reduces transaction costs and taxation. Overall, I believe that DFA funds are roughly comparable to vanguard or other factor funds as far as costs. And, in the international side, it is very difficult to find cheap factor funds/ETFs so DFA is even more competitive there, IMO. Their track record speaks for itself. If you believe in the factor premiums there simply is no better fund family than DFA. Eugene Fama is even on their board so to me that is enough reason.

Now I found a specific advisor who charges a one-time flat fee for DFA access, so for a large enough portfolio you can get DFA access for very little cost and no ongoing management fee.

Thanks for explaining the offsetting interest income, that makes DFA funds a lot more appealing knowing about that. Are you willing to share the advisor with the flat fee for DFA access? Please PM me if you can.

talltexan

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Re: DFA funds - are they worth it?
« Reply #12 on: June 04, 2018, 07:29:33 AM »
DFA funds implement something called "security lending" in which they lend out shares to investors who want to short them and collect interest on the loan. This ends up offsetting much of the expense ratio. Larry Swedroe has written a piece about it, just google "DFA security lending swedroe". In general, you can expect anywhere from 0.25%-0.4% in offsetting interest income that goes directly to the investor thus making the expense ratio much more competitive. DFA also uses whats called "patient trading" in that they don't follow a specific index rather they make their own indexes and trade very rarely. This reduces transaction costs and taxation. Overall, I believe that DFA funds are roughly comparable to vanguard or other factor funds as far as costs. And, in the international side, it is very difficult to find cheap factor funds/ETFs so DFA is even more competitive there, IMO. Their track record speaks for itself. If you believe in the factor premiums there simply is no better fund family than DFA. Eugene Fama is even on their board so to me that is enough reason.

Now I found a specific advisor who charges a one-time flat fee for DFA access, so for a large enough portfolio you can get DFA access for very little cost and no ongoing management fee.

Thanks for explaining the offsetting interest income, that makes DFA funds a lot more appealing knowing about that. Are you willing to share the advisor with the flat fee for DFA access? Please PM me if you can.

It's my understanding that DFA isn't the only fund family who do this. Vanguard may even do this. But Cheers for low expense ratios!

Nate79

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Re: DFA funds - are they worth it?
« Reply #13 on: June 04, 2018, 01:50:00 PM »
DFA funds implement something called "security lending" in which they lend out shares to investors who want to short them and collect interest on the loan. This ends up offsetting much of the expense ratio. Larry Swedroe has written a piece about it, just google "DFA security lending swedroe". In general, you can expect anywhere from 0.25%-0.4% in offsetting interest income that goes directly to the investor thus making the expense ratio much more competitive. DFA also uses whats called "patient trading" in that they don't follow a specific index rather they make their own indexes and trade very rarely. This reduces transaction costs and taxation. Overall, I believe that DFA funds are roughly comparable to vanguard or other factor funds as far as costs. And, in the international side, it is very difficult to find cheap factor funds/ETFs so DFA is even more competitive there, IMO. Their track record speaks for itself. If you believe in the factor premiums there simply is no better fund family than DFA. Eugene Fama is even on their board so to me that is enough reason.

Now I found a specific advisor who charges a one-time flat fee for DFA access, so for a large enough portfolio you can get DFA access for very little cost and no ongoing management fee.

Thanks for explaining the offsetting interest income, that makes DFA funds a lot more appealing knowing about that. Are you willing to share the advisor with the flat fee for DFA access? Please PM me if you can.

It's my understanding that DFA isn't the only fund family who do this. Vanguard may even do this. But Cheers for low expense ratios!
Yes, all fund families (Vanguard, Schwab, etc) do securities lending. It's nothing special.

Sent from my SM-G950U using Tapatalk


privatefarmer

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Re: DFA funds - are they worth it?
« Reply #14 on: June 06, 2018, 02:52:09 AM »
not all fund families pass on the income from securities lending to the shareholders. DFA passes on 100% of the proceeds to offset the ER.

one example, DFAs fund DEMSX has an ER of ~70bps however if you compare it to the DFA index that it tracks it's actually Outperformed the index over the last 20 years... I think this is largely due to the securities lending income. swedroe wrote a good article on this.

Tyler

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Re: DFA funds - are they worth it?
« Reply #15 on: June 06, 2018, 01:03:12 PM »
not all fund families pass on the income from securities lending to the shareholders. DFA passes on 100% of the proceeds to offset the ER.

one example, DFAs fund DEMSX has an ER of ~70bps however if you compare it to the DFA index that it tracks it's actually Outperformed the index over the last 20 years... I think this is largely due to the securities lending income. swedroe wrote a good article on this.

1) Passing on 100% of the securities lending proceeds to offset the ER is just a fancy way of saying "adding unnecessary risk to your investments to pay ourselves more money".  ;)  I don't consider it something to brag about.  But in any case, virtually every index provider does it (including Vanguard). 

2) DEMSX is an emerging markets fund.  I can't speak for DFA practices specifically, but many international index funds beat their index not because of securities lending or other market-beating management but because of a reporting trick.  It's common for funds to compare their returns to the worst-case net return of the index (international funds must withhold taxes for each country they invest in), but jump through a bunch of tax loopholes to minimize their own taxes (domiciling the fund in Ireland, inter-fund accounting tricks, etc).  So it's not really apples-to-apples.  Once you account for the difference in tax reporting, most funds still generally trail the index. 

BTW, I really like Swedroe but you have to remember when he talks about DFA funds that he has a financial interest in promoting them.
« Last Edit: June 06, 2018, 02:44:32 PM by Tyler »

Radagast

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Re: DFA funds - are they worth it?
« Reply #16 on: June 06, 2018, 08:26:42 PM »
1) Passing on 100% of the securities lending proceeds to offset the ER is just a fancy way of saying "adding unnecessary risk to your investments to pay ourselves more money".  ;)  I don't consider it something to brag about.  But in any case, virtually every index provider does it (including Vanguard). 
That's how I feel too.