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The DFA fund advantage
Robert T 06-11-2007, 11:06 PM | Post #2398746 | 
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If an investor has fixed target factor loadings for a portfolio (75:25 equity:fixed income, with 0.2 and 0.4 size and value loading targets) then what is the advantage of using DFA versus non-DFA funds to achieve this target (excl. an advisor fee)? Here is may best guess - hope I'm not too far off.

DFA portfolio return advantage:

[1] Style consistency.......................0.15%
[2] Block trading...........................0.08%
[3] No reconstitution arbitrage.............0.05%
[4] Taxes...................................0.00%
[5] Expenses Ratio.........................-0.06%

Annual DFA advantage........................0.22%

The assumptions used (as described below) can be changed to match different expectations - but my sense is that the DFA advantage for the above mentioned portfolio is about (perhaps not more than) 0.2% per year.

DFA have some excellent products and with no access fee I would use them for my retirement investments (currently use DFA funds through the WV529 select plan for college education investments). I currently prefer a lower cost do-it-yourself approach for retirement - time will tell whether I can tolerate the inevitable market collapses and market booms to stay the course.

Robert
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[1] Lower factor loading drift. Assumes a 10% drift in value and size loadings of a non-DFA index fund portfolio relative to a DFA fund portfolio. This translates into actual portfolio loadings for size and value for a non-DFA fund portfolio to be 0.18 and 0.36, instead of 0.2 and 0.4 due to downside style drift. The calculation is based on an expected size and value premium of 2 and 4 respectively. The DFA style consistency advantages was estimated as 0.75* ((0.2-0.18)*2 + (0.4-0.36*4)) = 0.15. Just an assumptions - other can be used if more appropriate.

[2] Assumes a 3% price advantage over other mutual fund companies on purchases of small cap stocks, an annual turnover of 20% is assumed (10% from purchases, 10% from sales), and 25% of the portfolio in small cap stocks. (3*0.1*0.25 = 0.075%). Also assumes no price advantages on trades for large cap stocks.

[3] Expected to be a fairly small benefit, dependent on which index funds are used for the non-DFA portfolio. The DFA benefit will likely be larger when compared to a portfolio tracking Russell indexes versus S&P indexes for example (at least IMO).

[4] Assumes no tax benefit of DFA tax managed funds over ETFs.

[5] The estimated expense ratio of a 75:25 'DFA sample strategy" is about 0.37% while for a non-DFA portfolio of similar factor loadings it is about 0.31% which equates to a 0.06% percent difference.

Originally posted in thread: 59269
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