DFA vs. Vanguard: Are the Higher Fees Worth It? A Live Q&A Perspective
Choosing the right investment funds is crucial for building a secure financial future. Two popular options that often come up in this discussion are Dimensional Fund Advisors (DFA) and Vanguard. Both offer diversified, low-cost investment options, but significant differences in their investment philosophies and fee structures raise a vital question: Are DFA’s higher fees worth it compared to Vanguard’s ultra-low cost index funds?
This article will explore the nuances of DFA and Vanguard, highlighting their key differences and ultimately providing a framework for you to decide which option best aligns with your individual financial goals and risk tolerance. We’ll also present a Live Q&A section where you can get your burning questions answered directly!
Understanding the Players: DFA and Vanguard
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Vanguard: Renowned for its commitment to low-cost investing, Vanguard pioneered the index fund. Their funds track broad market indexes like the S&P 500 or the Total Stock Market, offering diversified exposure at extremely competitive expense ratios. Vanguard’s unique ownership structure, where the funds are owned by their investors, allows them to prioritize cost-efficiency.
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DFA: Dimensional Fund Advisors takes a more sophisticated, academically-driven approach. While they also invest in a diversified manner, they target specific “factors” (also known as “smart beta” factors) that research suggests have historically outperformed the market over the long term. These factors include:
- Small Cap: Investing in smaller companies.
- Value: Investing in companies with lower price-to-book ratios.
- Profitability: Investing in more profitable companies.
DFA funds are not passively managed like Vanguard’s index funds. They utilize a systematic, rules-based approach to identify and capture these factor premiums. Furthermore, DFA funds are typically only available through registered investment advisors, adding another layer of professional oversight.
The Fee Differential: A Crucial Consideration
Vanguard’s claim to fame is its rock-bottom expense ratios. You can find funds tracking major market indexes for as little as 0.03% per year. This incredibly low cost makes Vanguard a compelling choice for many investors.
DFA, on the other hand, charges higher fees, often ranging from 0.20% to 0.40% or even higher depending on the specific fund and the advisor’s fees. This difference in fees can significantly impact long-term returns, especially over decades of investing.
The Case for DFA: Chasing Higher Returns (with added risk)
DFA argues that their higher fees are justified by the potential for higher returns. By systematically targeting small-cap, value, and profitability factors, they aim to outperform the market over the long run. The academic research supporting factor-based investing is extensive, suggesting that these factors have historically delivered excess returns.
However, it’s important to acknowledge that past performance is not indicative of future results. Factor premiums can be cyclical, meaning they may not always be present, and there can be periods of underperformance. Furthermore, small-cap and value stocks can be more volatile than the overall market.
The Case for Vanguard: Simplicity and Cost-Effectiveness
Vanguard’s appeal lies in its simplicity and low cost. By tracking broad market indexes, you gain diversified exposure to the market without the need for active stock picking or factor timing. The significantly lower fees mean that more of your investment returns stay in your pocket.
For investors who believe in the efficiency of the market or prefer a passive investing approach, Vanguard’s index funds are an excellent choice. They provide a solid foundation for long-term wealth accumulation without the complexity or higher costs associated with factor-based investing.
Making the Right Choice: A Framework for Decision-Making
So, are DFA’s higher fees worth it? Here’s a framework to help you decide:
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Investment Philosophy: Do you believe in the potential for factor-based investing to outperform the market over the long term? Or do you prefer a passive, market-tracking approach?
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Risk Tolerance: Are you comfortable with the potential for periods of underperformance and higher volatility associated with small-cap and value stocks?
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Time Horizon: Factor premiums may take time to materialize. Do you have a long-term investment horizon that allows you to weather potential periods of underperformance?
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Financial Advisor: Are you working with a qualified financial advisor who understands both DFA and Vanguard funds and can help you build a portfolio that aligns with your goals and risk tolerance?
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Fee Sensitivity: How sensitive are you to fees? Even small differences in expense ratios can significantly impact long-term returns.
In summary:
- Choose Vanguard if: You prioritize low costs, prefer a passive investing approach, and are comfortable with market-average returns.
- Choose DFA (with careful consideration) if: You believe in factor-based investing, are comfortable with potential underperformance and higher volatility, and have a long-term investment horizon. Crucially, working with a financial advisor familiar with DFA is highly recommended.
LIVE Q&A: Your Questions Answered!
Now it’s your turn to ask questions! Post your queries in the comments section below, and we’ll do our best to provide insightful and helpful answers. Topics we can cover include:
- Specific DFA and Vanguard fund comparisons
- The impact of taxes on DFA and Vanguard funds
- Choosing the right asset allocation with DFA or Vanguard
- Understanding the role of a financial advisor in DFA investing
- Debunking common misconceptions about DFA and Vanguard
We’re here to help you navigate the complex world of investing and make informed decisions about your financial future. Don’t hesitate to ask your questions! Let’s start the conversation!
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I noticed you were adding a one percent fee on both portfolios not just the DFA one. Which with the Vanguard one, you wouldn't have any AUM or advisor fees.
Nobody should be paying %AUM just to get access to DFA funds. DFA themself trains their advisors to reject such clients. Some of them felt so strongly about it that they split off and formed Avantis to bring DFA’s strategies to DIY investors via ETFs.
But if you are going to pay for a %AUM advisor (and there are valid reasons to do so), you should pick one that uses DFA. Not just for higher returns, which are nice, but also because DFA has extremely high standards for whom they will allow to use their funds.
Many DAF are now available as ETFs… no admin fees. What now? Is this still actual what you said?
BND return so bad they changed the web page and dropped that info from the landing page.
The 4K prediction….
Here is an idea, do a video on trade corrections, when an advisor does not follow youre trade instructions.
You are my hero, on this one.
I am working on some research, and you essentially did it all for me right there.
Or at least got me through to 85%
“You can’t just pick one date in the past and see who wins” *as he picks 17 dates in the past and picks the ONE where dfa doesn’t outperform.
We get it dude… you hate financial advisors
Cool but not as relevant now since dimensional is also publicly funded now.
Always choose a fee-only based advisor. Never pay a percentage over AUM
0940. You really needed to tweek the handles to find a way to have DFA underperform after costs;). Now with the DFA ETFs all is available without advisor costs. QED DFA is superior
CIT bank is 2% on savings
Couldn't you buy the stocks in the DFA fund individually and avoid the high expense ratio?
1:26:00 A good place for short term savings in 2022 is VTIP. Current dividend yield is over 5%.
Rob: The basic tennant of investing is that the investor DOES want capital gains. That is how he/she makes money.
I predict S&P 500 to be at 4700 by year end, 2022, because several have predicted it would rise in 2022.
But I don't know about 2023, could be a drop then.
Black coffee and a black coffee mug. …… good touch.
Another good video–thanks. Point-of-Order: I'm still learning Portfolio Visualizer. I searched and searched for the option to add management fees to my backtesting analysis. That feature is ONLY available with their top-tier account @ $39 per month. You have biased me to be fee adverse; therefore I haven't yet splurged for the $468 per year tool.
To the extent you need to rebalance & need to invade principle… withdraw from those asset classes that bring you back into balance first.
How long has it been since you've played (under) tournament "classical time control" conditions? What was your highest rating?
Rob, I see you have a trackpad for your left hand a mouse for your right. I've used that for years. I only use the mouse for work that requires that level accuracy. Nice to see I'm not the only one 🙂 lol.
Hey Rob, love the content. As an advisor who lives on 1% fees, and doesn't use DFA, I think you are totally correct there should be no reason you pay a 1% fee for advice, but if you sat in the meetings with clients you would probably be a much bigger proponent of the setup pretty quickly. If you are getting tax advice, estate planning advice, portfolio management, and dealing with a complex family dynamic, that 1% is money well spent. Half my clients barely know how to use a smart phone, let alone analyze ETFs and mutual funds. They are worried because their wife has never managed a portfolio, and their health is failing, and need someone who they trust to look after the portfolio so their widow doesn't just stick it all in cash.
I am in agreement that someone sophisticated with a good plan in place for when the dementia kicks in, who has been to an EP attorney, who has a good relationship with their tax guy, and who very carefully monitors and understands their investments can probably DIY it just fine.
I also think a lot of advisors are spoiled by charging their fee for only portfolio advice, meet infrequently, and don't have the capacity to offer additional services wrapped into their fees. I think those also tend to be the people who get offended at the idea that their services aren't for everyone.
As for why some clients are a better fit for portfolio fees rather than hourly, if you custody and manage the investments on a discretionary basis it allows you to assist in the estate distributions, make changes more rapidly if need be, bypass technological challenges with older clients, etc. You wont find people willing to custody and make discretionary decisions based on hourly fees. You may not care for that service, but it is a huge help when mom is in the nursing home, her competence is in question, and her PoA doesn't know the difference between a stock and a bond. It also makes billing much easier for retirement accounts for tax reasons.
I do half VIOV and half AVUV, for 20% of my portfolio. But, yes, I have no idea which will do the best over the long run. I got super lucky and transferred 10% of my portfolio from long term bonds to small cap value exactly on March 23, 2020, the very bottom of the pandemic crash. But it was luck, not prediction. Why do I like your videos so much? I guess you're an entertainer, in addition to your other talents.
I would love a video with your opinon/commentary about Avantis ETF funds? The paul merriman and his team seems to like them quite a bit. Seems like a good cheap option for access to some DFA like funds? Thanks!
Haven’t dived
My first wife had a retirement account in Fidelity. In her last few months, she called Fidelity to ensure that I was listed as her beneficiary. After she died of cancer I found out that she had 3 accounts with Fidelity and two of them had a $0 balance while the 3rd was much larger than that. The guy over the phone set me up as the beneficiary to only one of the $0 accounts. 10yrs later I still don't have the money. Maybe it was just one really bad customer service rep who really didn't think about what he was doing. But I won't ever do business with Fidelity out of principle.