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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
