Disaster at DFA

For over five years, this website has warned readers to avoid DFA funds and invest in Vanguard instead. We’ve pointed out the relatively high fees, poor performance, high risk, lower diversification, and less tax efficient nature of DFA versus Vanguard.

Hopefully you were paying attention in 2018, and dumped your DFA holdings before 2019 began – because failing to switch would have cost you a large amount of money.

Let’s look at the results for 2019. We’ll compare three funds:

Fund	Symbol	Strategy
Vanguard Total US Market	VTSAX	Total US stock market, market cap weighted.
DFA Vector Equity	DFVEX	Total US stock market, small/value weighted.
DFA Small Value	DFSVX	Small/value stocks only.

And here are the 2019 results:

The Vanguard fund rose 30.4% in 2019, the Vector Equity fund 25.7%, and the small value fund 17.8%. (this site measures returns through Dec 30, since that’s the date DFA’s Vector Equity and other total US stock market funds were created). Looked at another way, here are the gains on a $500k investment in each fund in 2019:

That’s a stunning difference when you consider all three funds track the same asset class (stocks) in the same country. This, year, I’ve given DFA a break and not tacked on the 1% fee most investors have to pay their friendly DFA advisors for the privilege of owning these “elite” funds.

Note that the DFA Small Value fund isn’t directly comparable to the Vanguard fund, since it doesn’t cover the entire stock market. But DFVEX, which is a total US Stock market fund, is.

Critics will note that this is just one year – too short a period to draw any conclusions about the superiority of one fund versus another.  And so, once again, let’s show the complete, 14 year history of Vanguard vs DFA, since the DFA fund’s inception in 2005:

Vanguard’s experienced 248.2% growth, versus 187.8% for DFA. Happy birthday, DFVEX. Here’s how that looks in dollar terms (once again I’ve assumed no DFA advisor fee):

To be clear, the Vanguard fund simply represents all stocks in the US market, weighted by the size of each company. Investors pay DFA to outperform that passive index.

Once again this year, DFA company owners and their network of salespeople made a lot of money. And, once again, DFA investors underperformed.

A new year is upon us. Which company will you choose in 2020?

 

Judging DFA’s “value” marketing angle with 20 years of real world data

Since 1993, the cornerstone of DFA’s marketing strategy has been that “small” and “value” stocks offer superior returns for investors. This was based on historical data compiled by two academics, Eugene Fama and Kenneth French, who were soon on the DFA payroll.

The Fama/French data showed not only that value stocks outperformed growth, but that small growth stocks were especially bad. As DFA advisor William J. Bernstein wrote in 2002:

But the larger point is simply not to buy small growth funds at all—this is a miserable asset class, with long-term historical returns lower than all other market segments.

DFA advisors such as Larry Swedroe, and others made similar claims, with Swedroe declaring small growth stocks the Black Hole of Investing. Ouch.

There was just one problem: the Fama/French data had little relationship to real world mutual funds. Much of its supposed “small value premium” came from a few, tiny, illiquid stocks that no mutual fund could own. It also assumed holdings could be bought and sold with no transaction costs, which only happens in academic papers and marketing brochures.

Could the “small value premium” be realized in reality? And was avoiding small growth stocks a valid strategy?

In 1998, Vanguard decided to find out. It launched two index funds: one Small Growth (VISGX), one Small Value (VISVX). These were the first small value and growth index funds.

We now have 20 years of data from each of these products. We’ve been able to track them through two economic cycles, including the recessions of 2002 and 2009. The results (total return, source: Morningstar):

After 20 years, Vanguard’s Small Value fund returned 488%, versus 572% for Small Growth. Not exactly the “black hole” the DFA data predicted.

DFA advisors continue to market based on Fama/French data, as if these questionable historical results have any real world significance. If the data above isn’t enough to discredit it, I don’t know what is.