The Dimensional Fund Advisors Versus Vanguard Battle

 

There’s no longer an argument that index funds beat actively managed funds. 

But there remains a battle between two types of index funds.  DFA (Dimensional Fund Advisors) claim to reign supreme. 

They tilt their portfolios towards small cap and value cap.  They also claim to have a superior way of trading.

But when comparing DFA’s funds to Vanguard’s index funds (in an apples-to-apples test) I found that Vanguard won. I first wrote about that here, testing DFA’s funds against their Vanguard equivalents. 

I’ve since updated that comparison. 

Here’s Portfolio 1, Comprising DFA’s Funds

 

Here’s Portfolio 2:  Vanguard’s Equivalents

 

 

Using Portfoliovisualizer.com, I compared results from January 2007 until April 30, 2018.

As you can see below, Vanguard’s Portfolio (Portfolio #2) won once again.  It averaged a compound annual return of 6.67 percent. 

In contrast, DFA’s equivalent funds managed a compound annual return of 6.63 percent. 

The race was close.  But Vanguard did win.

What’s more, Vanguard’s equivalent funds recorded a standard deviation of just 16.95%. 

Standard deviation is a measure of volatility.  The lower the better.

DFA’s equivalent was more volatile, recording a standard deviation of 18.07%.

I love DFA’s funds.  But in an apple- to-apples (factor to factor) test against their Vanguard’s equivalents, they were a step behind their promise during this time period.  

That doesn’t mean, however, that they won’t win over other time durations.  But long term, there will likely be just small performance differences between these two great giants.  

 

January 1, 2007 – April 30, 2018

Portfolio 1= Dimensional Fund Advisors (DFA)

Portfolio 2= Vanguard’s indexes 

 

 

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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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6 Responses

  1. Mark says:

    Andrew,

    I read your book for expatriate investing and am at a standstill regarding my investment options. I reside in the US and have a large chunk of $ sitting in a chequing account. In chapter 16, you mention avoiding US domiciled stocks and ETFs due to the estate taxes. Maybe I am not as concerned about this as I should be – I’m 32, not married, no children -because I recently opened a Vanguard US brokerage account with plans to start my investing journey. I am having second thoughts as to whether I am doing the right thing. Would I be better off looking into another account like Canadian based TD Waterhouse (I’m assuming that would not affect my residency status), an offshore account (would I benefit from this being a US resident?), or should I stick with US Vanguard. I may stay in the US long term should the opportunity allow for it. If I do stay long term, would that influence what account I should open?

    Regards,
    Mark

  2. Steve Adams says:

    Hi Andrew! I enjoy reading your posts. There’s no reason to compare large numbers of DFA funds that cover tiny bits of the market. Simply look at their all in one Core an Vector funds.

    Here are 13 years of data: https://dfavsvanguard.wordpress.com/

  3. Eric E. Haas says:

    Hello Andrew,

    The results of your test are predictable and don’t point to the conclusions that you came to. During the period in question, value stocks significantly underperformed the market. DFA’s value funds are simply more “valuey” than Vanguard’s value funds. Thus, during times when value stocks underperform (like the period you studied), a more-valuey portfolio (like DFA’s) would be expected to underperform a less-valuey portfolio, all else being equal. When the situation eventually flips (and value stocks outperform), you’d similarly expect more-valuey funds (like DFAs) to outperform less-valuey funds (like Vanguard’s).

    So your study is just confirming that the period in question was a period which didn’t reward value very well. On average and in the long-run, you’d expect value to outperform (i.e., because the value premium is generally believed to be positive on average and in the long run) — so the more valuey portfolio should outperform.

  4. Benjamin Felix says:

    Andrew, I think that it is important to consider what I have outlined in the following post when making the comparison between Dimensional and Vanguard. The way that you have written this post is likely to be confusing for any reader without the additional context. https://www.pwlcapital.com/dimensional-versus-vanguard/

    • You’ve written a good post Benjamin. Long term, I doubt there will be little difference between these two great giants. To be fair, I doubt neither should suggest superiority over the other. Long term, it’s going to be much like splitting hairs.

      Cheers,
      Andrew

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