Disclosures for the Hypothetical Backtested Performance of Model Index Portfolios and Indexes

Index Fund Advisors, Inc. (IFA) does not guarantee any minimum level of investment performance or the success of any index portfolio, index, mutual fund or investment strategy. Past performance does not guarantee future results. There is a potential for loss in any investment, including loss of principal invested. All investments involve risk and investment recommendations will not always be profitable. No representation is being made that any IFA client account will or is likely to achieve profit or losses similar to those shown in hypothetical backtested performance. Impacts of federal and state taxes and trading costs are not included in the results of index portfolio or index returns. Hypothetical backtested performance information shown in text, charts, tables and graphs are provided for informational purposes only and should not be considered investment advice or recommendations to buy or sell any types of securities.

Hypothetical Backtested Performance

1. The IFA Indexes include several stock and bond indexes that represent a monthly data series that begins with index data from various sources on January 1, 1928. The construction of IFA Indexes data introduces live mutual fund data of funds that are similar to the preceding index upon the inception date of the funds and uses that monthly mutual fund data up to the current month. IFA Index Portfolios are allocations of a globally diversified selection of between 11 and 15 IFA Indexes, where the Index Portfolio designation number represents the allocation to stock indexes versus bond indexes. For example an IFA Index Portfolio 90 is 90% IFA stock indexes and 10% IFA bond indexes. The data for both the IFA Indexes and the model data for IFA Index Portfolios is hypothetical backtested performance data that represents a combination of index data and mutual fund data. Please refer to the IFA Indexes Data Sources page at www.ifaindexes.com for a description and the time series construction of the underlining index and mutual funds for each IFA Index. A review of the IFA Index Data Sources, IFA Indexes Time Series Construction (http://www.ifa.com/disclosures/charts/#timeseries) and several of the Dimensional Indexes (http://www.ifa.com/disclosures/charts/#dfafunds) is an integral part of this disclosure and should be read in conjunction with this explanation of the hypothetical backtested performance of the indexes and the model IFA index portfolios, which are allocations of the IFA Indexes. An extensive glossary of terms used throughout IFA’s content can be found at https://www.ifa.com/glossary/.

2. The investment strategy of the IFA index portfolios is a buy and hold strategy with annual rebalancing of the index allocation on the first of each year. The data is provided to show historical risk and return performance had the indexes and index portfolios been available over the relevant time period. IFA did not offer the index portfolios until November 1999. Prior to 1999, IFA did not manage client assets. There are certain limitations inherent in model results, particularly that model returns do not reflect trading in actual client accounts and do not reflect the impact that material economic and market factors may have had on the adviser’s decision-making had the adviser actually managed client funds. Unlike an actual performance record, hypothetical backtested performance results do not represent actual trading. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. In addition, simulated trading does not involve nor take into account financial risk and does not take into account that material and market factors may have impacted IFA’s decision making, all of which can adversely affect actual trading results. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can also adversely affect markets in general or the implementation of any specific trading program. Hypothetical backtested performance does not represent actual performance, trading costs or the impact of taxes and should not be interpreted as an indication of such performance.

3. Hypothetical backtested performance also differs from actual performance because it is achieved through the retroactive application of model index portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. Hypothetical backtested performance is calculated by using a software program that starts with the first day of a selected month and ends with the last day of a selected month. Whenever the term IFA Index Portfolio Value data is used, it is based on a starting value of one at the beginning of stated time period.

4. Hypothetical backtested performance results for IFA index portfolios are based on a buy and hold strategy, with annual rebalancing on the first of each year. It is important to understand that the assumption of first of the year annual rebalancing has an impact on the monthly returns reported for IFA Index Portfolios throughout the year. If there were monthly rebalancing instead, the monthly return would be calculated with the assumption that the portfolio is perfectly in balance at the beginning of each month. For annual rebalancing, the year-to-date and monthly return is calculated with the assumption that the portfolio is perfectly in balance only at the beginning of each year. In actual client portfolios, however, rebalancing occurs as needed, and such actions are dependent on both market conditions and individual client cash inflows and outflows, along with the cost impact of such transactions on the overall portfolio.

5. Hypothetical backtested performance results for index portfolios does include the reinvestment of dividends and capital gains and is shown net of IFA’s highest advisory fee of 0.9%. The fee of 0.075% is deducted from month end returns, unless stated otherwise. However, actual client advisory fees are deducted quarterly, in advance. Depending on the amount of assets under management and other factors, investment management fees may be less. IFA accepts no fees from investment product firms.

Performance Results and Composition of IFA Indexes and IFA Index Portfolios

6. Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA’s advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions. Tax liabilities will vary per investor and can result from various activities in taxable and tax-deferred accounts. These activities include, but are not limited to rebalancing of portfolios, any sale of securities, tax loss harvesting, interest, dividends and capital gains distributions from equity funds and individual securities in taxable accounts. There are also tax liabilities associated with distributions from tax-deferred accounts. Not all IFA clients follow IFA’s recommendations and depending on unique and changing client and market situations, IFA may customize the construction and implementation of the index portfolios for particular clients. IFA provides various index portfolio implementation strategies, such as the use of tax-managed mutual funds, global extended maturity bond funds, municipal bond funds, social or sustainable screens added to funds, diversified portfolios of various index fund providers, use of core funds or global asset allocation funds. These various implementations of IFA Index Portfolios will likely have risks and returns that vary from the IFA Index Portfolio Models. As the result of these and other variances, actual performance for client accounts have been and are likely to be materially different and may be less than from the results shown in the IFA Index Portfolio Models. Clients should consult their account statements for information about how their actual performance compares to that of the index portfolios and ask your IFA Wealth Advisor to explain any differences.

7. The indexes and mutual funds used in the IFA Indexes are IFA’s best estimate of an index or mutual fund that comes closest to the corresponding IFA Index objectives. Simulated index data is used for the period prior to the inception of the relevant live mutual fund data and a mutual fund expense ratio is deducted from the simulated index data. Live (or actual) mutual fund performance data is used after the date each mutual fund was added to the IFA Indexes. The IFA Indexes Times Series Construction goes back to January 1928, with an increasing diversification to international markets, emerging markets and real estate investment trusts as data became available. As of January 1928, there are four equity indexes and two bond indexes; in January 1970 there are a total of 8 indexes, and there are 15 indexes in March 1998 to present. See (https://www.ifa.com/disclosures/charts/#IFA_evolution) to see the analysis of the evolution of these index portfolios.

8. This is the history of changes made to the IFA Indexes and IFA Index Portfolios: 1992-2000: IFA’s Original Index Portfolios 10, 30, 50, 70 and 90 (the number refers to the percentage of stock indexes versus bond indexes in the allocation) were suggested by Dimensional Fund Advisors (DFA) in 1992 (ifa.com/pdfs/1992.pdf), as an example of globally diversified asset classes, with moderate modifications in 1995 (ifa.com/pdfs/1995.pdf). Index Portfolios between each of the above listed portfolios were created by IFA in 2000 by interpolating between the above portfolios. Portfolios 5, 95 and 100 were created by IFA in 2000, as a lower and higher extension of the DFA 1992 risk and return options. There are numerous other changes that occurred from 2002 to present and they are all described on www.ifa.com/disclosures/history/.

9. The S&P 500 Index is an unmanaged market capitalization-weighted index composed of the 500 most widely held, publicly traded stocks, whose assets and/or revenues are based in the US. The inclusion of information within charts and graphs relating to the S&P 500 Index is for informational purposes and shown as a comparison to other indexes, index portfolios, stocks or funds and as a general performance of large companies in the U.S.

Information About Index Fund Advisors

10. Index Fund Advisors, Inc. is an SEC registered Investment Adviser. Information pertaining to IFA’s advisory operations, services, and fees is set forth in IFA’s current Form ADV Part 2 (Brochure) which is available upon request and at www.adviserinfo.sec.gov. The IFA investment strategy is based on principles generally known as Modern Portfolio Theory and the Fama and French Four Factor Model for Equities and Two Factor Model for Fixed Income. IFA Index portfolios are designed to provide substantial global diversification in order to reduce investment concentration and the resulting potential increased risk caused by the volatility of individual companies, indexes, or asset classes. IFA defines index funds as funds that follow a set of rules of ownership that are held constant regardless of market conditions. An important characteristic of an index fund is that its rules of ownership are not based on a forecast of short-term events or the mispricing of securities. Therefore, an investment strategy that is limited to the buying and rebalancing of a portfolio of index funds is often referred to as passive investing, as opposed to active investing. IFA is not paid any brokerage commissions, sales loads, 12b-1 fees, or any form of compensation from any mutual fund company or broker dealer. The only source of compensation from client investments is obtained from asset-based advisory fees paid by clients or tax or accounting related services. More information about advisory fees, expenses, mutual fund fees, and prospectuses for mutual funds can be found at https://www.ifa.com/fees/.

Associated Risks

11. IFA Index Portfolios will be implemented for clients by investing in an allocation of mutual funds that match the asset classes, mainly mutual funds from Dimensional Fund Advisors. All mutual funds carry risk and those risks can vary depending on the underlining investments and the fund’s investment strategy. IFA Index Portfolios are numbered from 1 to 100 based on the percentage allocation to equity indexes. Index portfolios with lower equity allocations will have less risk, as measured by standard deviation, than those with a higher equity allocations. There is risk of loss in any securities investment, including the risk of loss of principal that the investor should be prepared to bear. Clients are provided with a copy of each mutual fund prospectus, which outlines the risks associated with the fund and should be read carefully. There is no guarantee that any IFA Index Portfolio will meet its investment objectives.

Standard Deviation Information

12. IFA utilizes standard deviation a quantification of risk. Standard deviation is a common measure of risk used by academics, analysts, portfolio managers and advisors. The higher the standard deviation the higher the risk. Standard deviation is calculated as the square root of the variance of the data from the average, which is a measure of the dispersion of a set of data from its average. If data points are far from the average, there is a higher deviation within the data set; thus, the more spread out the data, the higher the standard deviation. In finance, standard deviation is applied to the rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility or the uncertainty of expected returns. Among indexes of stocks, those with smaller companies, international companies and emerging market companies have had higher standard deviations than large companies in the U.S. in long time periods. Among bond indexes, those with longer durations and greater probabilities of default have had higher standard deviations in long time periods. However, it is not true that all indexes with higher standard deviations, such as small growth companies have had higher returns in long time periods. Annualized standard deviation is an approximation obtained by multiplying the monthly standard deviation by the square root of 12, which is 3.46. Please note that the number computed from annual data may differ materially from the estimate obtained from monthly data. IFA has chosen this methodology because Morningstar uses the same method. In those charts and tables where the standard deviation of daily returns is shown, it is estimated as the standard deviation of monthly returns divided by the square root of 22, which is 4.69.

Data Source Information

13. IFA licenses the use of data, in part, from Morningstar Direct, a third-party provider of stock market data. Where data is cited from Morningstar Direct, the following disclosures apply: ©2019 Morningstar, Inc. All rights reserved. The information provided by Morningstar Direct and contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. IFA Index Portfolios, times series, standard deviations, and returns calculations are derived using IFA software. IFA software applies rebalancing rules, monthly fee adjustments and creates time series construction of data. Our source data comes from many places including Dimensional Fund Advisors and Morningstar Direct software.


14. DISCLAIMER: THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION PROVIDED HEREIN OR ON THE MATERIAL PROVIDED. This document does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the user. All investments involve risk, including foreign currency exchange rates, political risks, market risk, different methods of accounting and financial reporting, and foreign taxes. Your use of these and all materials provided by IFA, including the www.ifa.com website and the IFA app is your acknowledgement that you have read and understood the full disclaimer as stated above. Updated 6-12-2019. For additional updates please refer to www.ifabt.com.