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Vanguard Vs. Dimensional: A Practical View

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In the funds industry, there's an old axiom: Mutual funds are typically sold, not bought. It's a fairly pragmatic reflection of how too many people simply go with a broker's sales pitch or choose investments on the basis of popularity and name recognition. 

When discussing index funds, for example, Vanguard has built a household brand with Main Street investors. Along the way, it has also attracted some $4 trillion in assets under management through its index mutual funds and exchange-traded funds.1

The best choice for each person's unique financial situation, however, isn't necessarily an indexing fund family with the biggest name. 

Our research shows that for a long-term investment strategy, representative funds from Dimensional Fund Advisors have outperformed on a relative basis against Vanguard. In the table below, we compare a select group of popular Vanguard index mutual funds that track major asset classes. The bar chart plots growth of an initial $10,000 invested in 2000 and left to grow for more than 20 years.

You can also click on the returns tab at the top to see net returns over this timeframe. In addition, we've included a tab to view how results would've turned out if Vanguard's funds could be purchased without an annual expense ratio being attached. The chart starts in 2000 because it was the first full-year of data of the Dimensional US Large Company Portfolio (DFUSX).

Also, it's worth pointing out that Vanguard doesn't offer index mutual funds to compete in several parts of the market. For this review, we've highlighted DFA's more comprehensive investing lineup in foreign stocks, namely in value-focused funds covering companies in developed countries as well as those in emerging markets. 

This analysis also takes into account each fund's weighted average market cap, which shows Dimensional's broader exposure to smaller cap stocks. At the same time, it makes clear that DFA's funds come with a higher book-to-market ratio, which is a measure of valuations. The bigger a ratio, the greater a tilt to value stocks. Of course, we know from research by leading academics like Eugene Fama and Kenneth French that favoring value stocks comes with higher expected returns over time.2

So what does this mean in practical terms? Essentially, diversification offers investors a way to reduce portfolio risks. Nobel Laureate Harry Markowitz was one of the first academics to identify the long-term benefits of adding additional assets to a portfolio. His work in understanding risk and how it applies to stock markets was seminal in the development of what became known as modern portfolio theory.

Indeed, IFA's portfolio managers have found that thoroughly researched diversification strategies can reduce portfolio volatility – without sacrificing longer-term expected returns. This appreciation of modern portfolio theory's attributes is why our globally diversified portfolios of index funds are designed to provide clients with exposure to more than 13,000 companies across 40-plus countries. 

In addition, academic research has identified certain criteria as drivers of long-term expected returns. These premiums available to investors include different factors such as size, value and profitability.

In nearly all asset classes, DFA is more heavily weighted to smaller-sized stocks than Vanguard. Historically, small caps have outperformed large caps over the longer haul. Dimensional's funds also favor value-style stocks, which have produced greater returns on average than growth-oriented fare.

Looking back to 1928, DFA's greater orientation to value (i.e., lower price-book ratios) has generally given its funds a boost. Also, screening for more profitable companies has produced a premium for long-term minded investors. (See table below.)

As we've written about many times in the past, our investment committee considers DFA one of the most under-appreciated leaders in the field. In fact, Fama and French are both on the company's board of directors. The list of directors who've helped to oversee Dimensional's funds over the years has read like a Who's Who of academia. Those have included Roger Ibbotson, Edward Lazear and Myron Scholes, to name just a few past and current directors at Dimensional. 

It all starts with DFA's research-intensive process that considers the largest sets of market data and index results going back more than 90 years. Such a methodology is based on emphasizing different stock and bond characteristics that've proved to be major drivers of long-term performance and risk dynamics. This gives Dimensional's mutual funds a different profile than those sold by Vanguard.

In short, not all index funds are created equally. In order to help you to look underneath an investment vehicle's hood, IFA's wealth advisors are trained to sift through key differences of seemingly similar funds. They're also experienced with taking a bigger picture perspective of your entire portfolio. This should help to show you how different pieces of the portfolio puzzle can be assembled to provide you with more bang for each dollar invested.  

Footnotes:

1.) Vanguard, "Does Your Index Fund Invest in You?" April 2020. 

2.) "The Cross-Section of Expected Stock Returns," (with Kenneth R. French), Journal of Finance, 47 (June 1992), 427-465. Winner of the Smith Breeden Prize for the best paper in the Journal during 1992.


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.