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  • Improving The Performance Of A Portfolio Of DFA Funds 8 comments
    Jan 16, 2014 3:13 PM

    The funds in the DFA family, recently highlighted in a number of articles on SA, have provided good returns since their inception, but, unfortunately, not without large drawdowns. Here I describe a quarterly rebalancing strategy of a portfolio of DFA funds and VFINX (the S&P 500 fund from Vanguard) that appears to considerably reduce the volatility without effecting the returns.

    To the basket of stock funds: VFINX, DFLVX, DFSTX, DFSVX, and DFREX , I add the bond fund VBMFX, which is based on the Barclay's Aggregate Bond Index.

    The basic strategy is described elsewhere ( ). It invests in three separate tranches, each with a different pair of evaluation and investment periods, and at the beginning of every quarter the funds are commingled and divided equally among the three tranches.

    For each tranche I select the three stock funds that performed the best during the immediately preceding evaluation period, and if any of the funds performed worse that the bond fund, it is replaced by the bond fund. The allocation to each of the selected funds in each tranche is then computed by means of the risk parity algorithm that uses the variance matrix computed from the daily returns during the evaluation period.

    The equity curve for the strategy is compared with that of the various stock funds in the following figure.

    (click to enlarge)

    As shown in the figure, and in the table below, the various performance metrics for the strategy for the period under study (1997-2013) are better than those for each of the components of the basket.


    CAGR (%)

    Standard Deviation (%)

    Max. Draw-down (%)

    Sharpe Ratio

    Sortino Ratio





































    The Manhattan asset allocation diagram and the raw allocation diagram are shown in the following figures.

    (click to enlarge)(click to enlarge)

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

    Additional disclosure: This is not investment advice in any shape or form.

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Comments (8)
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  • satan2liberals
    , contributor
    Comments (1204) | Send Message
    Purely academic because DFA advisers would never let you time the market.
    DFA is only available to institutional investors or through an authorized advisor.
    18 Jan 2014, 03:32 AM Reply Like
  • varan
    , contributor
    Comments (5774) | Send Message
    Author’s reply » It was a free service to RIAs who allocate DFA funds in their client's portfolios :)


    Anyway, it was just another illustration of the general approach that seems to work extremely well for many appropriately chosen baskets, for example,


    I do not want to go into a semantic discussion, but this is closer to re-balancing than market timing.
    18 Jan 2014, 09:51 AM Reply Like
  • Market Map
    , contributor
    Comments (916) | Send Message
    For curiosity, I looked in our TD Ameritrade retail IRA brokerage account and we can indeed trade the above DFS funds. Yet it states that " this fund is a transaction fee fund. This transaction is subject to a TD Ameritrade fee. This fee is in addition to any fees noted in the fund's prospectus ".
    18 Jan 2014, 04:23 PM Reply Like
  • varan
    , contributor
    Comments (5774) | Send Message
    Author’s reply » This method can be applied to a broad array of stock funds together with some fixed-income funds. If you have some funds to which you would like to apply this (assuming that they do not entail transaction fees if kept for at least three months as in the example linked to in my reply above), let me know, and I will post the results.


    Thanks for your interest.
    18 Jan 2014, 04:32 PM Reply Like
  • satan2liberals
    , contributor
    Comments (1204) | Send Message
    For curiosity, I looked in our TD Ameritrade retail IRA brokerage account and we can indeed trade the above DFS funds.


    S2L: Unless DFA has instituted a radical departure from their former business model, that is incorrect for the retail investor.
    Your DFA-approved financial advisor has access to them on your behalf at TD Ameritrade.


    I don't get what's so hard to understand about it.
    If you find that I'm incorrect (and can buy fund shares) by all means let us know.
    I'm sure there's lots of people that would love to buy DFA funds without the added cost of an advisors fee.
    18 Jan 2014, 04:59 PM Reply Like
  • varan
    , contributor
    Comments (5774) | Send Message
    Author’s reply » Was that directed at me? I understand very well that DFA funds come with hefty advisory/transaction fees, and that is why I stated that it was just meant as an illustration of the method.
    18 Jan 2014, 05:11 PM Reply Like
  • Market Map
    , contributor
    Comments (916) | Send Message
    As we have done extensive testing ( as presented in one of our SA articles ) on using DFSVX vs. QQQ in our strategy, we weren't planning on using DFA funds any time soon. The performance disadvantage of using a fund with a management fee even as low as 1% vs.a similarly performing fund with a "low" fee in a strategy over a 20 year period has been well documented ...
    18 Jan 2014, 08:09 PM Reply Like
  • varan
    , contributor
    Comments (5774) | Send Message
    Author’s reply » Very weird comments. I have acknowledged the limitation of DFA funds vis-a-vis the fees, and emphasized the illustrative nature of the post, but even then all this keeps coming up.
    18 Jan 2014, 08:33 PM Reply Like
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