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.

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