Why DFA Funds Are Better

1. DFA funds are passive investing

There are two broad schools of investment philosophies: passive and active. Passive money holds the market portfolio. Active money jumps around, but, in the aggregate, it also holds the market portfolio. Before investing costs, these two types of money must yield the same return. After investing costs, however, active money must earn less. This is simple arithmatic.

No wonder when asked "how to invest," Warren Buffett, the most successful active investor, actually counsels passive investing.

Though there are hundreds of mutual fund families in the US, only two are squarely in the passive camp: Vanguard and Dimensional Fund Advisors or DFA.

2. DFA funds capture all known market premiums

There are significant philosophical differences between DFA and Vanguard. Vanguard views market risk as one-dimensional: only beta risk is compensated by the market. DFA views market risk as three-dimensional: in addition to beta risk, small cap risk and value risk are also compensated by the market in the form of small cap premium and value premium.

DFA funds allow investors to capture all premiums that the market has to offer.

3. DFA funds avoid liquidity costs

Vanguard pioneered index investing. To track commercial indexes closely, Vanguard funds end up paying liquidity costs associated with buying (selling) a stock right after it has been added to (dropped from) an index. DFA takes an asset class investing approach and avoids such costs.

4. DFA funds keeps out hot money

DFA funds are accessible to retail investors only through select DFA-approved advisors. This has the effect of keeping out hot money that drags on fund performances.

Second Opinion Review

To find out if your portfolio can be enhanced by DFA funds, schedule a free second opinion review with us.