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Index Funds Advisors (IFA) has a list of model portfolios using comprehensive DFA (Dimensional Funds Advisors) funds for various risks. The model portfolios have a long history of performance. They are excellent lazy portfolio templates for index investors who prefer a buy and hold investing style.

Index Funds Advisors' DFA 401k plan consists of 19 funds. These funds enable participants to gain exposure to 5 major assets: US Equities, Foreign Equities, Emerging Market Equities, REITs, and Fixed Income.

Asset Class Ticker Name
LARGE BLEND DFUSX DFA US Large Company
LARGE VALUE DFLVX DFA US Large Cap Value I
SMALL BLEND DFSTX DFA US Small Cap I
SMALL BLEND DFSCX DFA US Micro Cap I
SMALL VALUE DFFVX DFA US Targeted Value I
Global Real Estate DFGEX DFA Global Real Estate Securities
Foreign Large Value DFIVX DFA Intl Value I
Foreign Small/Mid Value DFISX DFA Intl Small Company I
Foreign Small/Mid Value DISVX DFA Intl Small Cap Value I
DIVERSIFIED EMERGING MKTS DFEMX DFA Emerging Markets I
DIVERSIFIED EMERGING MKTS DFEVX DFA Emerging Markets Value I
DIVERSIFIED EMERGING MKTS DEMSX DFA Emerging Markets Small Cap I
ULTRASHORT BOND DFIHX DFA One-Year Fixed-Income I
WORLD BOND DFGFX DFA Two-Year Global Fixed-Income I
WORLD BOND DFGBX DFA Five-Year Global Fixed-Income I
SHORT GOVERNMENT DFFGX DFA Five-Year Government I
MID-CAP VALUE DFUEX DFA U.S. Social Core Equity 2
Global Real Estate DFITX DFA Intl Real Estate Securities I
DIVERSIFIED EMERGING MKTS DFESX DFA Emerging Markets Social Core Equity

Since DFA funds are only accessible by qualified investment advisors, it is of interest to many individual investors who would prefer using ETFs. We further construct a plan using many low cost ETFs as proxies to DFA funds. The following is the Index Funds Advisors' ETF Equivalent plan:

Asset Class Ticker Name
LARGE BLEND VV Vanguard Large Cap ETF
LARGE VALUE VTV Vanguard Value ETF
SMALL BLEND VB Vanguard Small Cap ETF
SMALL VALUE VBR Vanguard Small Cap Value ETF
SMALL BLEND IWC iShares Russell Microcap Index
REAL ESTATE VNQ Vanguard REIT Index ETF
Foreign Large Value EFV iShares MSCI EAFE Value Index
FOREIGN SMALL/MID GROWTH GWX SPDR S&P International Small Cap
Foreign Small/Mid Value DLS WisdomTree International SmallCap Div
DIVERSIFIED EMERGING MKTS VWO Vanguard Emerging Markets Stock ETF
DIVERSIFIED EMERGING MKTS DEM WisdomTree Emerging Markets Equity Inc
DIVERSIFIED EMERGING MKTS EWX SPDR S&P Emerging Markets Small Cap
Short-Term Bond BSV Vanguard Short-Term Bond ETF
WORLD BOND BWX SPDR Barclays Capital Intl Treasury Bond
Emerging Markets Bond EMB iShares JPMorgan USD Emerg Markets Bond
LONG GOVERNMENT IEF iShares Barclays 7-10 Year Treasury
MID-CAP VALUE DFUEX DFA U.S. Social Core Equity 2
Global Real Estate RWX SPDR Dow Jones Intl Real Estate
DIVERSIFIED EMERGING MKTS DFESX DFA Emerging Markets Social Core Equity

We eliminated Social Core funds as they are not used in IFA model portfolios and they have no ETF equivalent. We will have a follow up article on this ETF plan in more detail. For now, we focus on the comparison between the DFA funds and ETF portfolios.

The following shows the performance comparison among Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) model portfolios:

Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Index Funds Advisors ETF Equivalent Strategic Asset Allocation Moderate 10% 95% 5% 23% 5% 21%
Index Funds Advisors DFA Funds Tactical Asset Allocation Moderate 10% 105% 14% 140% 13% 128%
Index Funds Advisors DFA Funds Strategic Asset Allocation Moderate 16% 179% 8% 44% 7% 39%
Index Funds Advisors ETF Equivalent Tactical Asset Allocation Moderate 10% 110% 9% 81% 10% 81%

Performance table (as of Aug. 1, 2011)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Index Funds Advisors DFA Funds Tactical Asset Allocation Moderate 10% 105% 14% 140% 13% 128%
Index Funds Advisors DFA Funds Strategic Asset Allocation Moderate 16% 179% 8% 44% 7% 39%
Five Core Asset ETF Benchmark Tactical Asset Allocation Moderate 8% 86% 10% 85% 10% 71%
Five Core Asset ETF Benchmark Strategic Asset Allocation Moderate 10% 133% 6% 26% 6% 26%

click to enlarge


For a more detailed comparison, please refer here.

We make the following observations:

  • DFA portfolios outperform ETF equivalent similar portfolios by 1% in SAA or 2-3% in TAA annualized. This is very telling and calls for ETF industry innovation and fine tuning. For strategic asset allocation portfolios, even if one considers taking 0.5% paid to advisors, DFA portfolios still outperform, although not by a big meaningful margin anymore.
  • We set minimum holding periods for DFA funds as 90 days, compared with 30 days for ETFs. But this does not show any advantage at all for ETF portfolios, indicating fund qualities and low expense ratios are still the very key for portfolio performance.

To summarize, DFA funds have been crafted for portfolio building for a long period of time and they are excellent. ETFs show promise (especially for tactical asset allocation strategies, they are free of holding periods requirement). Clearly, the ETF industry has more to do to allow individual investors to have institutional quality funds.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Source: Index Funds Advisors DFA Plan vs. an ETF Equivalent Plan: DFA Has Slight Edge