When I first started using DFA mutual funds to invest client portfolios over 20 years ago, it was with a specific purpose. After giving up on trying to pick stocks and time the market (“active management”) in the early years of my career, I discovered the “Three-Factor Model” of investing—which was unheard of at Wall Street brokerage firms but was the gold standard of investing theory inside the halls of academia—and I wanted to use it to manage client portfolios.
The Three-Factor Model says that the long-term return of an investment portfolio is related to its overall stock/bond split, as well as its allocation to small stocks versus large stocks and lower-priced “value” versus higher-priced “growth” stocks. No market timing, just three major asset allocation decisions coupled with disciplined rebalancing.
The only question I had was which funds I should use. There were index funds from Vanguard and Charles Schwab that allowed me to invest in small cap and value stocks, but mainly in the US market (non-US options were and still are sorely lacking). I also noticed that traditional small cap and value index funds didn’t own the smallest or cheapest stocks, where expected returns were highest. These style-based index funds were watered down, holding too much in mid cap stocks and “blend” (between growth and value) companies. If I was going to use the Three-Factor Model, I wanted to do it right.
This is where DFA came in. I had learned about the company in my research on investing and was intrigued that the original academics who published the Three-Factor Model—Eugene Fama at the University of Chicago and Ken French at Dartmouth—were consultants at a mutual fund company called Dimensional Fund Advisors. One of Fama’s former students, David Booth, had co-founded Dimensional as an investment management company that would apply the findings from academic research to the management of real-world portfolios. Dimensional was the only firm in the industry offering products to implement the Three-Factor Model.
DFA funds weren’t watered down. If anything, they were high octane—they went right at the market's small cap and value segments and delivered a full dose of their returns. When small cap and value stocks outperformed the market, as they usually do, DFA funds had much higher returns than actively-managed funds and even index funds with similar-sounding names (ie, small cap or value). This is exactly what I wanted—style-pure funds allowing me to design portfolios with the utmost precision.
But this focus that DFA offered came with a potential drawback. What would happen during the inevitable (but unpredictable) periods where small cap and value stocks underperformed? Would DFA funds do far worse than their indexes? And would clients stick around through the underperformance, or would they follow the well-trodden path of selling lower and buying higher elsewhere? If DFA were a one-trick pony, only doing well when small cap and value stocks outperformed, a more moderate approach with lower but more consistent returns would be better for clients.
Fortunately, these concerns about DFA funds were unwarranted.
The table below reports the last 20 years of returns for serveral of DFA’s oldest stock mutual funds compared to their most appropriate index. The previous two decades are noteworthy because while stocks have done reasonably well despite numerous setbacks, we have not seen overwhelming small cap and value return premiums. Yet DFA funds have almost all outperformed their specific indexes and the broad market indexes. In other words—no premiums, no problem. DFA funds still managed significant outperformance, and the impact on the hypothetical growth of $100,000 was sometimes enormous.
Let’s look a little closer at the data. The returns for the S&P 500 Index (US large growth), the Russell 1000 Value (US large value), and Russell 2000 and 2000 Value Indexes (US small cap and small value) are listed first. The S&P 500 Index outperformed every other index, meaning large cap and growth stocks had the best returns; small cap and value the worst. And yet the DFA US Large Value Fund, US Small Cap, US Micro Cap, US Targeted Value, and US Small Value Funds ALL outperformed their indexes and the S&P 500 (except DFLVX, which was just 0.2% behind) as well. Who says you can’t get blood from a stone?
In international markets, the MSCI World ex-USA Small Cap Index beat the World ex-USA Index, but the value versions of the large and small cap indexes only matched or underperformed. So small beat large but value did not beat growth. No matter—every single DFA international fund beat its index and the MSCI World ex-US Index, and the DFA international value funds even outperformed their own blend funds (DFIVX beat DFALX and DISVX beat DFISX).
Finally, emerging markets. The MSCI Emerging Markets Index (large cap) had the same return as the EM Value Index (no value “premium”), while (not shown) the MSCI Emerging Markets Small Cap Index did a bit better than the large cap index, returning +10.0% per year. Each DFA fund did far better. Of note, the DFA Emerging Markets Value Fund returned +10.5%—a significant amount of value outperformance where none seemed to exist according to MSCI, and the DFA Emerging Markets Small Cap Fund beat the MSCI EM Small Cap Index by +1.5%, and the large cap index by +3% per year.
Even DFA’s Real Estate Fund outperformed the DJ REIT Index despite holding virtually identical companies.
I will compare these results to the overall mutual fund industry to understand how astonishing these results are. Over the 20 years from 2002 to 2021, only 44% of all US stock mutual funds available to invest in survived the entire two decades. Over 50% of them did so badly that they were closed down. And of that 44%, less than 20% outperformed their index. Compare that to the Dimensional table above—of the 14 funds listed, two tied their index (they are indexes), and the other 12 outperformed. That's 100% survival, 86% outperformance, and 14% ties.
Wow.
So DFA funds are anything but one-dimensional;exceptionalis a far better description.
While DFA’s funds tend to capture more of the small cap and value premium returns when those stocks perform best, that’s not the whole story. The benefit of owning DFA funds goes beyond intelligent construction. Their funds are updated periodically as the research on investment returns evolves—most recently, the addition of profitability as a (fourth) factor has made a big difference. And unlike index funds, whose holdings are only refreshed once or twice a year, Dimensional manages their funds and rebalances them (usually with cash inflows or outflows from the portfolios) every single dayso that they stay consistently focused on the subset of the market that they are designed to own. DFA’s performance relative to the rest of the mutual fund and exchange-traded fund industry has been extraordinary. I know of no other firm that comes close.
I talked with a long-time client last week and showed him this report. His family has invested with me this entire time. I felt pride in the fact that, two decades ago, I had proposed this approach to him even though it was relatively unknown and he and his family were unfamiliar with it. Like other clients I had and still have today, he trusted me to do the right thing for his family. And I trusted Dimensional to do what they said they would do: Stay focused, stay disciplined, and deliver the expected returns we thought were possible.
Two decades later, Dimensional has more than lived up to my expectations, and we have more wealth because of it. 100% of my personal and family money is invested in DFA funds, which is why I recommend the same for you.
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Past performance is not a guarantee of future results.Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or additional expenses except where noted. This content is informational and should not be considered an offer, solicitation, recommendation, or endorsem*nt of any particular security, product, or service.
FAQs
So DFA funds are anything but one-dimensional; exceptional is a far better description. While DFA's funds tend to capture more of the small cap and value premium returns when those stocks perform best, that's not the whole story. The benefit of owning DFA funds goes beyond intelligent construction.
What are DFA mutual funds? ›
Dimensional Fund Advisors is a company that sells mutual funds with $489,438M in assets under management. The average expense ratio from all Dimensional Fund Advisors mutual funds is 0.26%.
Why DFA funds are superior? ›
DFA funds are no-load (commission-free), low cost, very diversified, and tax-efficient. They provide a much broader and deeper coverage of the global markets than other mutual funds. DFA currently manages about $600+ Billion in assets. DFA funds focus on “factor investing”.
Are DFA funds better than Vanguard? ›
Vanguard may be a good choice if you're seeking a low-cost, passive investing strategy, while Dimensional Fund Advisors may be a better fit if you're looking for a more active, evidence-based approach.
Are Dimensional funds passive? ›
Dimensional's systematic investment approach combines a passive philosophy with active implementation.
Are DFA funds good? ›
Yet DFA funds have almost all outperformed their specific indexes and the broad market indexes. In other words—no premiums, no problem. DFA funds still managed significant outperformance, and the impact on the hypothetical growth of $100,000 was sometimes enormous.
What is the difference between DFA and index fund? ›
Indexing vs.
Index mutual funds invest in a specific index based on their investment objective, sampling the market for that particular asset class. On the other hand, DFA tracks the entire asset class corresponding to its investment objective. Consider it sampling versus owning assets as the whole class.
Who owns DFA funds? ›
Why is it so hard to book an appointment in DFA? ›
Booking an appointment online has been extra tricky lately, as the DFA reports that the number of slots available across the country were almost cut in half during the pandemic. Five new sites for passport appointments have been opened up, but those only operate till September.
Why use Dimensional funds? ›
DFA funds are very tax efficient. Mutual funds incur taxes in the same way individual investors do – by selling stocks at a gain. The IRS requires mutual funds to pay out those capital gains on an annual basis, hitting investors with a tax bill. The way DFA minimizes these taxes is by avoiding selling.
Look for funds that have expense ratios below 1 percent. If you can handle the $3,000 minimum initial investment, I like the low-cost Vanguard Total Stock Market Index Fund and the Vanguard Total International Stock Index Fund (vanguard.com; 877-662-7447).
Why is Charles Schwab better than Vanguard? ›
Charles Schwab: Online and Mobile Experience. Charles Schwab offers a generally more robust and well-designed user experience than Vanguard. As full-service brokerages, both platforms offer many ways to contact the firm if you have questions or need support. You can call, email, or chat with either Vanguard or Schwab.
What is the safest Vanguard investment? ›
Of the 3 main asset classes, cash is the safest, followed by bonds and then stocks. Safer investments also have lower average returns. By mixing investments, you can get a balance of both stability and growth potential.
What is the expense ratio for DFA fund? ›
DFA US Large Cap Value Portfolio has an expense ratio of 0.21 percent.
Why are passive funds better than active? ›
Investors in passive funds are paying for computer and software to move money, rather than a high-priced professional. So passive funds typically have lower expense ratios, or the annual cost to own a piece of the fund. Those lower costs are another factor in the better returns for passive investors.
Do active funds outperform passive funds? ›
Although both styles of investing are beneficial, passive investments have garnered more investment flows than active investments. Historically, passive investments have earned more money than active investments.
Should I invest in DFA? ›
DFA is a great fund family with discipline and low costs. The new ETFs will have even lower costs and more tax efficiency. I expect DFA will again be gaining assets and market share as riskier small cap value stocks begin to perform as well or better than the overall market for a more sustained period.
Is DFA an index fund? ›
Finally, DFA funds are different than index funds in that they require investors to work with an advisor versus having direct access to the funds. There are two reasons for this: By going through advisors, DFA is able to minimize the impact on the flow of funds in and out of their funds.
What is DFA known for? ›
DFAs are one of the most practical models of computation, since there is a trivial linear time, constant-space, online algorithm to simulate a DFA on a stream of input. Also, there are efficient algorithms to find a DFA recognizing: the complement of the language recognized by a given DFA.
What is the DFA balanced strategy? ›
The Dimensional Equity Balanced Strategy (“DFA Equity Strategy”) represents a theoretical global equity portfolio composed of mutual funds managed by Dimensional with tilts toward US, small cap and value companies.
That means instead of being available only to investors who were able to hire a DFA-approved financial adviser, anyone can buy them.
What is a DFA portfolio? ›
DFA is the acronym for Dimensional Financial Advisors and in one word – YES – all investors benefit from having DFA funds in their portfolio. The percentage of DFA funds in a portfolio depends on individual goals, age, obligations, and both short and long term desires.
Can I buy DFA funds through Schwab? ›
Yes. Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-515-2157. Please read the prospectus carefully before investing.
Are Dimensional Fund Advisors any good? ›
Dimensional Fund Advisors has an overall rating of 3.6 out of 5, based on over 392 reviews left anonymously by employees.
Who runs Dimensional funds? ›
David Booth is Chairman of Dimensional Fund Advisors, a firm he founded in 1981.
What to do if there is no available slot for passport appointment? ›
Since the DFA doesn't allow walk-in applications, you could try scheduling an appointment in another branch if there are no available slots in the nearest DFA office. On the page titled Application Information, select “NEW” in the Application Type dropdown menu. Next, fill out the online application form.
What is the best time for passport appointment? ›
Regular and non-emergency applicants must secure their slots by setting an online appointment. As much as possible, do it months before your desired travel date to give you enough lead time.
Is it okay to walk in for passport appointment? ›
Schedule an appointment online. Walk-in applicants are normally not allowed EXCEPT for emergency and special cases. Regular and non-emergency applicants must secure their slots by setting an online appointment.
Can I buy Dimensional funds without an advisor? ›
Dimensional Funds are institutional-class mutual funds that can only be purchased through approved Fee-Only advisors.
How do Dimensional Fund Advisors make money? ›
To find an advisor nearest you,* select one of the options below and enter your zip code. Dimensional Fund Advisors receives an investment management fee on the assets of clients who invest in one or more Dimensional funds and Dimensional separately managed accounts (SMAs).
ETFs | Dimensional. Dimensional's exchange-traded funds (ETFs) are built on 40 years of experience using financial science to pursue higher expected returns for investors. Market prices contain reliable information that can be used to position portfolios toward outperformance.
Do millionaires use Vanguard? ›
The median household in the study has over $1 million with Vanguard and those below the median have assets outside of Vanguard (i.e. real estate, non-Vanguard accounts, etc.) that make most of them millionaires as well.
What is the most aggressive American fund? ›
AFIFX is often the most aggressive of the American funds, yet it's still slightly less volatile than the S&P 500. The fund has topped the index by an average of 76 basis points (a basis point is one one-hundredth of a percent) per year over the past 15 years.
Are Vanguard funds better than Fidelity? ›
Bottom Line. Overall, Vanguard and Fidelity are both great choices for those interested in investing. They offer a wide range of investment options, low costs, and hands-off or active management depending on your preference. When it comes to index funds, Vanguard is hard to beat, with hundreds of low-cost options.
Why investors are pulling money from Vanguard? ›
Johnson says it could be clients pulling out money because they're retiring, or because they're negatively affected by the pandemic. Perhaps some are opting for active management as the markets become more volatile.
Why do people prefer Vanguard over Fidelity? ›
While Vanguard stands out with its suite of funds, the brokerage is more limited when it comes to other offerings. However, it does allow investors to trade individual stocks and bonds. Conversely, Fidelity allows clients to invest in individual stocks, bonds, ETFs, options, mutual funds and more.
Which is safer Vanguard or Charles Schwab? ›
Is Charles Schwab better than Vanguard? After testing 17 of the best online brokers over three months, Charles Schwab (94.51%) is better than Vanguard (71.94%).
What are the best Vanguard funds for retirees? ›
8 of the Best Vanguard ETFs for Retirees
| Vanguard ETF | Inception Date | Annualized Return Since Inception |
|---|
| Vanguard Total World Stock ETF (VT) | 6/24/2008 | 6.6% |
| Vanguard High Dividend Yield ETF (VYM) | 11/10/2006 | 8% |
| Vanguard Ultra-Short Bond ETF (VUSB) | 4/5/2021 | 0.7% |
| Vanguard Short-Term Treasury ETF (VGSH) | 11/19/2009 | 0.8% |
4 more rowsMay 12, 2023
Money market funds and other securities held in the Vanguard Brokerage Account are eligible for SIPC coverage. Securities in your brokerage account are protected up to $500,000. To learn more, visit the SIPC's website. Up to $250,000 by FDIC insurance.
What is the safest investment with the highest return? ›
High-quality bonds and fixed-indexed annuities are often considered the safest investments with the highest returns. However, there are many different types of bond funds and annuities, each with risks and rewards. For example, government bonds are generally more stable than corporate bonds based on past performance.
Fund Performance
The fund has returned -8.26 percent over the past year, 14.06 percent over the past three years, 0.57 percent over the past five years and 2.89 percent over the past decade.
What is the history of DFA Funds? ›
Dimensional Fund Advisors (DFA) was founded in 1981 by David Booth and Rex Sinquefield to apply academic research on capital market behavior to the practical world of managing investment portfolios. DFA maintains close links with the University of Chicago and other research centers for financial economics.
Are DFA funds mutual funds? ›
Dimensional Fund Advisors (DFA) is a mutual fund company located in Austin, Texas.
What is the downside of passive income? ›
Disadvantages of Passive Income
The limitations of passive income are as follows: No control on returns: You might not be able to control the returns on your passive income sources. For example, the stocks you have bought could fall in value, and the dividends aren't guaranteed.
What are the disadvantages of passive investing? ›
Downsides to passive investing
- Live by the benchmark, die by the benchmark. Index funds follow their benchmark index regardless of the state of the markets. ...
- Lack of flexibility. ...
- Fewer windfalls. ...
- Less pain but less gain.
Index investing is perhaps the most common form of passive investing, whereby investors seek to replicate and hold a broad market index or indices. Passive investment is cheaper, less complex, and often produces superior after-tax results over medium to long time horizons than actively managed portfolios.
How often does passive investing beat active investing? ›
If you're investing for the long term, passive funds of all kinds almost always give higher returns. Over a 20-year period, about 90% index funds tracking companies of all sizes outperformed their active counterparts.
What is one downside of active investing? ›
Disadvantages of active investing
Big money trades the markets and has a lot of expertise. Most active traders don't beat the market. It's so tough to be an active trader that the benchmark for doing well is beating the market.
How often do active funds outperform passive funds? ›
According to data from Morningstar, over the ten-year period to June 2022, only one in four active funds outperformed their passive peers.
What does DFA stand for in investing? ›
Dimensional Fund Advisors, L.P. (branded Dimensional abbreviated DFA) is a private investment firm headquartered in Austin, Texas.
The Distributional Financial Accounts (DFAs) provide quarterly estimates of the distribution of a comprehensive measure of U.S. household wealth, beginning with the third quarter of 1989 and through the most recent quarter.
What are the 4 types of mutual funds? ›
Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds.
What are the DFA strategies? ›
The four primary tenets of DFA philosophy of investing are: markets work, dimensions, diversification and structure.
Does DFA have ETFs? ›
Dimensional's exchange-traded funds (ETFs) are built on 40 years of experience using financial science to pursue higher expected returns for investors.
What is DFA profitability factor? ›
DFA's definition of direct profitability is a bit technical: operating income before depreciation and amortization minus interest expense divided by book value. In non-accounting terms, companies with high direct profitability are expected to have better returns than those with lower direct profitability.
What does DFA stand for acronyms? ›
The Department of Foreign Affairs (DFA) advises and assists the President in planning, organizing, directing, coordinating, integrating, and evaluating the total national effort in the field of foreign relations in pursuit of its Constitutional mandate.
What does Dimensional Fund Advisors do? ›
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing.
