Seeking Alpha article follow up | Replicating A Dimensional Funds Portfolio
Friday, June 3, 2011 at 7:21PM One comment I received on this article on seekingalpha.com suggested that the sample ETF portfolio I constructed was not a good match. Below you will find my response along with an "X-Ray" from Morningstar comparing the two portfolios.
I think you missed the point of the article. It was not at all intended to put DFA down which is why I made the positive comments at the beginning. The purpose of the article was not to suggest a particular allocation, not to say an ETF portfolio will outperform DFA or even to suggest particular ETFs to use to replace DFA. The purpose was simply to show that with a little bit of effort, you can create a similar portfolio to DFA at home. I just showed one simple example.
I agree with you that DFA is a great company and they have had good returns. They have achieved these returns not by security selection but by adjusting their exposure on the risk scale towards value and small cap. The problem with DFA is that they are not easily accessible for many investors and advisors (unless they use a TAMP which means the client will be paying extremely high fees). Also, this article was written with the assumption that most Seeking Alpha readers are more inclined to do it themselves as opposed to hiring an advisor to do everything for them.
It is not difficult to simulate the holdings of a set of DFA equity funds when you are building an entire portfolio because you can adjust the weighting of each fund to achieve your desired exposure to large, mid, small, value and growth. It is difficult to directly compare a single DFA fund to another single ETF or mutual fund because they tilt their funds toward small cap and value in much different ways than most other funds. If there is a problem with this model, it is not with the equity portion but with the fixed income portion. There simply are not enough good choices of fixed income ETFs yet. If I were seriously trying to replicate DFA on this, I would look to other mutual funds not to ETFs.
You mention that DFA has outperformed Vanguard and iShares by 2%-3% over the last decade. Many times when this statement is made, they are not comparing equivalent funds (i.e. not enough small cap or value exposure). You seem to know quite a bit about this issue so I would assume you are referring to the study by Edward Tower and Zhang Yichong but this study was not conclusive on the comparison because results varied depending on which time period was examined.
You do bring up a very good point that an advisor should be able to more than compensate for their fees by simply helping clients avoid behavioral mistakes. The ability to stick with a plan and have confidence in it is by far the biggest issue when attempting to do this yourself.