Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday November 1, 2021. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Dimensional Fund Advisors DFA ETFs

We are always interested in new ETFs, especially those from reputable firms. The recent Dimensional Fund Advisors (DFA) mutual funds to ETFs conversion piqued our interest. In this newsletter, we look at some of the core DFA ETFs. 

Dimensional Fund Advisors and its index mutual funds

First, a few words on DFA. For those who have financial advisors to help managing some of their portfolios, DFA might not be strange. The firm is well known for its ultra low cost index mutual funds. In fact, it’s one of the top two index fund power houses — the other being Vanguard. Compared with Vanguard, these DFA mutual funds are usually better crafted by DFA’s in house managers. They essentially follow enhanced indexes — meaning indexes such as US equity market but with their own fine tuned indexing technique as well as meticulous rebalancing management. By contrast, Vanguard index funds usually follow some well known published indexes such as CRSP US total market index (tracked by the famed VTI, Vanguard total stock market index ETF), or FTSE Developed All Cap ex US Index tracked by VEA, Vanguard FTSE Developed Markets ETF. 

The other difference: DFA funds can only be accessed through financial advisors or from a (work place) retirement plan such as a 401k plan. You will not be able to buy them from a brokerage (though this has been relaxed somewhat in recent years). On the other hand, you can directly purchase most Vanguard funds through a brokerage. 

In terms of expenses, DFA funds are usually more expensive, often more than 0.1% to 0.2%, which are big enough:

DFA ETFs vs. Vanguard Expense ratio
Ticker/Portfolio Name Expense Ratio
DFAC (DFA US Core Equity 2 ETF) 0.19%
DFAU (DFA US Core Equity Market ETF) 0.12%
VTI (Vanguard Total Stock Market ETF) 0.03%
DFAI (DFA International Core Equity Market ETF) 0.18%
VEA (Vanguard FTSE Developed Markets ETF) 0.05%
DFAE (DFA Emerging Core Equity Market ETF) 0.35%
VWO (Vanguard FTSE Emerging Markets ETF) 0.1%

Of course, ultimately, we’ll need to look at net performance (or investor returns) after fees to see whether DFA funds deserve these higher fees. 

In general, many financial advisors actually tout being able to hold DFA funds as an advantage over DIY (Do It Yourself) approach. 

DFA ETFs vs Vanguard ETFs

As most existing DFA ETFs were converted from their index mutual funds this year, their performance/return history is too short. The one with the longest history  is DFA ETF DFAU (US Core Equity ETF) that was listed on 11/20/2020. The following is its return chart, compared with Vanguard VTI: 

So virtually, their returns are the same in this short period. 

To really look at longer history, we have to resort to comparing these funds’ mutual fund counterparts. The following table compares the corresponding index mutual funds from the two firms: 

Portfolio Performance Comparison (as of 10/18/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
DFEOX (DFA US Core Equity 1 I) — DFAU 19.9% 33.1% 17.6% 16.9% 15.4% 10.2%
VTSAX (Vanguard Total Stock Mkt Idx Adm) — VTI 20.0% 32.0% 20.1% 18.3% 16.1% 10.7%
DFIEX (DFA International Core Equity I) — DFAI 12.2% 29.5% 10.1% 9.6% 7.9% 4.8%
VTMGX (Vanguard Tax-Managed Intl Adm) — VEA* 11.6% 28.7% 11.7% 10.4% 8.0% 4.5%
DFEMX (DFA Emerging Markets I) — DFAE 3.1% 20.5% 10.9% 9.1% 5.3% 5.7%
VEMAX (Vanguard Emerging Mkts Stock Idx Adm) — VWO 5.5% 19.4% 13.6% 9.7% 5.5% 5.5%

* NOTE: VTMGX used to be called Vanguard Tax-Managed Intl Adm fund. Vanguard converted/combined this fund with its developed market international index fund. 

To summarize, we can safely conclude that DFAU or DFA US Equity has a large enough underperformance compared with Vanguard’s VTI. This is very noticeable: the 0.5% 15 yr annualized return difference cannot simply be explained by the DFA’s higher fee (0.09% or so). 

On the other hand, DFA international fund DFAI led Vanguard VEA by 0.3% annually for the past 15 years. It also outperformed in emerging market stocks slightly. 

Our take is that DFA’s proprietary technology can deliver some meaningful excessive returns in markets or asset classes that are less efficient. These include international markets, emerging markets and US small cap stocks. However, as it tends to charge more to fund its research and trading, the advantage becomes less pronounced, although maybe still noticeable. Investors can consider to use DFA funds in those less efficient asset classes. For us, we believe it’s ok to wait for more data. 

Market Overview

Investors have a high expectation for Q3 earnings report as well as future earnings projection. As of last Friday, based on Factset, the blended Q3 earnings growth for S&P 500 companies was 30% (after 8% of these companies reported earnings), compared with 27.6% a week ago. The bulk of reports will pour in in the coming weeks. Markets have showing fatigue but they are hanging on. 

However, we do want to emphasize that while we are enjoying the elevated markets and the temporary ‘wealth’ created by the ever rising security prices, this is one of few periods in history when stocks and other financial assets are in full blown speculative frenzy. Though our strategies do call for fully invested in risk assets such as stocks, it doesn’t mean investors should just throw caution out of window. In fact, we advocate the other way around: keep a cool head and maintain cautious stance and respond according to market’s further development.

As always, we advocate the following practice:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation is still extremely high by historical standard. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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