Admittedly, few investment companies inspire more passionate feelings than Vanguard and Dimensional Fund Advisors (DFA). So many investors are invested in the idea that either one of those companies is the best that there are numerous analyses devoted to comparing them.
A Google search on “DFA vs. Vanguard” yields 114,000 results. A page on the Bogleheads website—named for Vanguard founder John Bogle—has 168 posts; Morningstar has a similarly named thread in its discussion forum. Indeed, the New York Times recently waded into the dispute with an article last month.
Now comes advisor Jeff Troutner, writing “DFA and Vanguard,” the subject of his firm Equius Partners’ April newsletter.
While there are legions of Vanguard fanatics out there, the good folks at Equius are confirmed DFAheads, as many advisors are.
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Troutner argues that media coverage of investments tend to be biased toward Vanguard because of a simpleminded focus on costs, thereby missing out on the research DFA employs to engineer funds he claims delivers higher net returns over time. “You really do get what you pay for,” Troutner writes.
Troutner, the chief investment officer for Equius, a Northern California-based advisory firm, says a broader look at the numbers is less favorable to Vanguard than unsuspecting advisors might think.
That is because Vanguard has different share classes which, in effect, cost small investors more than lower-fee classes often used in fund comparison calculations. Troutner says a small Vanguard investor can end up paying as much as four times what an institutional Vanguard investor will pay.
He says that while DFA’s funds cost 25 basis points more, on average, than Vanguard funds, “the smallest investors at Vanguard will pay 70% more for a basic market fund than they would for a comparable DFA fund.”
Beyond costs, Troutner says that the real issue is performance, and he disputes a Morningstar calculation cited in last month’s New York Times report that favored Vanguard fund investors’ 10-year returns over DFA investors to the tune of 6.614% over 5.05%.
Writes Troutner: “There is nothing ‘actual’ about the returns the Times published. They don’t represent actual mutual fund returns and they don’t represent returns investors actually realized.”
To generate what he says are actual returns, Troutner made 10-year calculations that included returns from “all fund share classes,” not just Vanguard’s lowest-cost share classes. Equal-weighting the assets favored DFA, 12.8% to 10% (the time period differed from the Morningstar calculation because it included the most recent quarter). But asset-weighting the returns favored DFA more significantly (14.5% to 10.1%) since most DFA investors are heavily weighted to the small-cap and value funds on which DFA’s reputation is based.
Beyond actual return, Troutner, like many DFAheads who stress the value of an advisor, says that “realized” returns are what investors should keep their eye on.
“The returns shown on the previous page cannot be realized by investors unless they are willing to buy and hold—with periodic rebalancing to their target allocation—through thick and thin,” he writes.
To cost-conscious investors who value cheap index funds, in which Vanguard excels, Troutner cautions that “indexing doesn’t come with a behavior modification pill, and firms such as Vanguard do not prevent investors from jumping in and out of their funds any more than active fund companies do.”
Troutner notes that DFA’s favored small-cap and value stocks have higher expected returns but tend to decline more in tough markets as seen in 2008-09, thus illustrating the advantages an advisory relationship has in maintaining investor discipline.