Do More “Concentrated” DFA Portfolios Outperform?

As discussed here, Dimensional Fund Advisors (DFA) uses a variety of strategies to attempt to outperform the market. In its early years, it offered a only a collection of fragmented and sometimes overlapping funds designed to capture different bits of the US stock market. This made it hard for advisors to manage client accounts, and tough for observers to track the performance of DFA portfolios as a whole.

In 2005, DFA solved this problem by creating a series of all in-in-one investments which sought to capture their entire strategy in a single investment. No more would clients have to continually rebalance among individual funds, possibly incurring capital gains taxes.

Three funds were created, with varying degrees of “DFA magic”, or concentrations in the small and value stocks DFA felt would beat the market as a whole. Allow me introduce them:

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

The Core 1 and 2 funds were launched September 15, 2005, with Vector being released three months later. For more on these products, and DFA equity strategies generally, see the DFA website.

To get an idea of the differences in these funds, consider the average size of the companies held in each fund, as calculated by Morningstar, and compared to the Vanguard Total Stock Market fund:

As you can see, the market cap of the average stock in the DFA Vector fund is just 1/6 of the Vanguard Total Market fund. Note that this is a simple, not a weighted average.

Let’s now look at how these funds have performed over the past decade, and infer how much DFA magic, if any, we ought to include in our own portfolios.

Core 1: DFA Light

As DFA planned, DFEOX isn’t hugely different from the total stock market as a whole – in fact, of its 25 size and value fund categories, Morningstar puts both it and the Vanguard Total Stock Market fund (VTSAX) in the same “Large Blend” box. The chart below, also from Morningstar, shows the daily growth of these two funds (updated in 2019). The blue line is DFA, the red line is Vanguard.

The Vanguard Total Market and DFA Core 1 portfolio histories are almost indistinguishable. After 14 years, a $10,000 investment in VTSAX was worth $34,070, while the same amount grew to $33,119 in the Core I fund. This DFA fund only underperformed Vanguard by 10% over the period.

Core 2: Medium Strength Magic

Did DFQTX, with its smaller and more value-y profile, give investors something better, or an least different? Let’s look:

As we’d expect, DFA’s middle child (blue) shows a bit more variation from the total US stock market (red). They’re still pretty highly correlated though, which isn’t to surprising since stock prices in a particular country tend to move together. Since Core 2’s inception, a $10,000 investment is worth $31,253, about $2,817 less than Vanguard, once again before advisor fees in the case of DFA.

Vector: Hard “Core” DFA

This brings us to DFVEX, the least broadly diversified of the three. By making large bets on very small and value-y stocks, it invests customer funds on a relatively small portion of US economic output. How does it stack up?

Now we’re starting to see some real variation from the market as a whole. The Vector fund also had the weakest performance of the three. A $10,000 investment in each would have underperformed a whopping $5,415 since the inception of the DFA fund in 2005. Vanguard outperformed DFA, cumulatively, by 54%!

Conclusion

The greater diversification of the Vanguard Total Stock Market fund, and its slightly lower cost, allowed it to offer better returns than the three DFA funds. Add in advisor fees investors must pay for DFA access and the difference is of course much greater.

Going forward, each of these funds will, by definition, perform only as well as the stocks they hold, less fees. Future stock performance is unknowable, so its entirely possible that, for example, the Vector fund will roar ahead in the coming years. The compounding drag of the higher fees of the DFA funds, however, makes this unlikely over the long term, especially on a risk adjusted basis.