Dimensional Funds vs Vanguard: A Comparison of Investment Approaches

Dimensional Funds and Vanguard are two well-respected investment management companies, but they have distinct approaches to investing.

Dimensional Funds focuses on whole markets, not individual stocks or bonds, to minimize costs and maximize returns. This approach is based on the idea that the overall market is more efficient than individual securities.

Vanguard, on the other hand, is known for its index fund approach, which tracks a specific market index to provide broad diversification and low costs. Vanguard's index funds have been around since 1976 and have been a staple in many investors' portfolios.

Dimensional Funds, however, has a more nuanced approach, using a combination of fundamental and quantitative analysis to select securities that are likely to outperform the market.

Vanguard is known for its low expense ratios, often leading the low-cost investing movement.

DFA and Vanguard are both very low-cost mutual fund companies compared to others, but Vanguard slightly outperforms DFA in terms of the lowest cost.

Index fund management can be low-cost, as it's computer driven and set to "auto-pilot" to follow the stated index.

The cost difference between Vanguard and DFA is relatively small, but it can add up over time.

DFA's funds require more work, using time-tested economic theory to weigh their portfolios, which results in a higher cost.

A 12 basis point difference in expenses between Avantis ETFs and Vanguard can be a significant hurdle for the Avantis strategies to overcome.

In other asset classes, the cost difference is even larger, such as 18 basis points between Avantis and Vanguard.

Dimensional Funds use a factor-based investing approach, focusing on characteristics that drive higher returns over time.

Their investment strategy is rooted in academic research, unlike traditional index funds that simply track an index.

Dimensional Fund Advisers (DFA) custom design their funds to capture specific risk factors, such as company size and value.

They "tilt" their portfolios by weighting certain stocks that have historically delivered higher returns than the stock market.

This approach allows DFA to avoid the cost bump that traditional index funds experience when a new stock enters an index.

By focusing on characteristics rather than duplicating an index, DFA's funds can be built more efficiently, potentially saving investors money.

Vanguard has more than 60 unique funds to choose from, each tracking an index in a bond or stock market.

Dimensional Fund Advisors (DFA) takes a different approach, custom designing their funds to capture risk factors like company size and value.

DFA's funds are designed to tilt towards certain stocks that have historically delivered higher returns than the stock market.

They focus on small-cap stocks and value stocks, which are companies with a relatively small market capitalisation - between $300 million and $2 billion.

This approach allows DFA to potentially avoid a cost bump that traditional index funds like Vanguard's can experience when a new stock enters an index.

DFA's funds cost more than traditional index funds, but their back-tested studies suggest the cost would be worth it.

Vanguard's average index fund expense ratio is very low, 82% lower than the average mutual fund, due to their large number of funds and economies of scale.

Dimensional Fund Advisers has been around for over 30 years, translating research into practical investment solutions for their clients.

They have a strong focus on data and implementation, and adapt as research evolves, helping investors.

Dimensional Fund Advisers is used by AES, more information on why they use DFA can be found elsewhere.

Vanguard is a well-known financial services group, with over 7 trillion USD of global assets under management as of March 2024.

They were founded by Jack Bogle in 1975 and are famous for their index funds, which track a specific index.

Dimensional Fund Advisors LP (DFA) has 584 billion USD in firmwide assets under management as of Dec. 31, 2022.

They have offices in 14 different locations globally, making them a fast-growing company.

However, in terms of size, Vanguard is still much bigger than DFA.

Beating vanilla index funds isn't easy on a consistent basis, with Vanguard's actively managed funds typically lagging their main index funds.

Indexing is a popular investment approach that involves investing in a specific index, such as the S&P 500, to track its performance. Vanguard is a well-known pioneer in creating and marketing index mutual funds or ETFs to investors.

Index mutual funds invest in a specific index, sampling the market for that particular asset class, whereas DFA tracks the entire asset class corresponding to its investment objective. This means DFA's approach is like owning assets as a whole class, rather than just sampling the market.

Vanguard has more than 60 unique funds to choose from, each tracking an index in a bond or stock market. The average Vanguard index fund expense ratio is very low, at 82% lower than the average mutual fund.

Dimensional Fund Advisors (DFA) takes a different approach, custom designing their funds to capture risk factors such as company size and value. They "tilt" their portfolios to maximize expected dimensions of return for their clients.

DFA's funds offer exposure to premium factors like size, value, and profitability that have historically generated higher returns. This approach is based on academic research and focuses on factors that have been shown to drive higher returns over time.

In contrast, Vanguard's index funds track an index, which can lead to a cost bump when a new stock enters the index. DFA's approach avoids this cost bump by building portfolios based on characteristics, not just stock names.

Dimensional funds and Vanguard offer some of the lowest expense ratios in the industry, saving you around 1% per year in reduced expenses compared to actively managed retail funds.

Both have very low expense ratios, similar to index funds, which is a major advantage over other investment options.

Vanguard's ETFs have some of the lowest expense ratios in the industry, making them a cost-effective choice for investors.

Here's a comparison of the benefits of DFA and Vanguard funds:

It's essential to research and understand how each fund works before making a decision, as everyone's situation and preferences differ.

Both Dimensional and Vanguard are great investment options, and you can't go wrong with either one. They're better than what most people are invested in.

Dimensional and Vanguard have strengths and weaknesses, but they're both good choices. They're better than low-interest deposit accounts, toxic structured products, or poorly performing active funds portfolios.

It depends on your individual circumstances, goals, and financial situation. Researching and understanding how the fund works is key to making a decision.

Understanding the fund's mechanics is crucial before investing. Otherwise, you can end up losing your hard-earned money.

ETFs have become a popular choice for investors due to their flexibility and cost-effectiveness. They can be bought in any brokerage or IRA account, commission-free at major places like Vanguard, Schwab, and Fidelity.

One significant advantage of ETFs is their tax efficiency. Vanguard index funds and their ETF equivalents are very tax-efficient, with some Avantis funds showing a comparable loss of 21.8% to taxes.

ETFs also offer more accessibility than traditional mutual funds. You can buy them in your 401(k) brokerage window option, if available, or through a financial advisor who can manage your money. However, the typical fee for these advisors was 1% of assets under management (AUM), which may not be justified by the benefits of DFA funds alone.

Vanguard ETFs, in particular, have some of the lowest expense ratios in the industry, making them an attractive option for investors.

DFA has been a world leader in developing tax-advantaged strategies and mutual funds for investors.

DFA funds have more precisely defined market segments, such as large vs. small companies, value vs. growth, and so on, resulting in better asset allocation controls and, ultimately, better returns.

DFA has very low expense ratios, similar to index funds, which save 1% per year in reduced expenses compared to actively managed retail funds.

Here are some key benefits of DFA funds at a glance:

The performance difference between Dimensional Funds and Vanguard is significant, as seen in the example of Avantis ETFs outperforming Vanguard ETFs over three years, with AVUS returning 16.04% compared to VTI's 13.33%.

This outperformance can be attributed to Avantis' smaller and more value-y approach, as evidenced by its smaller average market cap and lower P/E ratio. In contrast, Vanguard's VTI had a larger average market cap and higher P/E ratio.

Comparing Vanguard's small value fund VBR to Avantis' AVUV, we see that AVUV has outperformed VBR over the last three years, returning 27.25% per year compared to VBR's 18.65%. However, this outperformance comes with a smaller average market cap and lower P/E ratio.

Here's a comparison of Vanguard's and Avantis' small value offerings:

The track record shows a difference between Avantis and Vanguard ETFs. Avantis' AVUS has outperformed Vanguard's VTI with a 3-year return of 16.04% compared to VTI's 13.33%.

A closer look at the numbers reveals that AVUS has a smaller average market cap of $68 billion and a lower P/E ratio of 15.34, compared to VTI's $134 billion and 19.34. This suggests that AVUS' smaller and more value-y approach may be the reason for its outperformance.

Comparing the small cap value offerings between Vanguard and Avantis, we see that Avantis' AVUV has a 3-year return of 27.25% compared to Vanguard's VBR at 18.65%. This is a significant difference, and it's likely due to Avantis' larger small and value tilts.

However, if you're looking to tilt towards small and value factors, you can simply do so with a Vanguard-based portfolio. By tilting 3:1 towards small value, you can enjoy the benefits of factor-based investing without the added expenses of an Avantis fund.

Losing money with DFA funds is a real possibility due to market fluctuations.

Every fund carries some level of risk, and you could lose some or all of your money if you invest in DFA funds because the securities held by the fund can lose value.

You should always invest with your own money, not borrowed money, to avoid ending up in debt.

A personal loan taken out to invest in mutual funds can increase your debt burden, making it harder to pay off existing debts.

Debt consolidation combines several loans or liabilities by obtaining a new loan to pay off the debts, which can be a necessary step in managing debt.

You could lose some or all of your money if you invest in DFA funds due to the inherent risk in the securities held by the fund.

Vanguard's products are widely available to individual investors through its website, as well as through a range of third-party brokerages and financial advisors.

Dimensional Fund Advisors' products are only available through financial advisors and institutional clients.

If you're looking to invest with Vanguard, you can easily do so online, giving you a lot of flexibility and convenience.

Vanguard's products are widely available to individual investors through its website, as well as through a range of third-party brokerages and financial advisors.

You can easily access Vanguard's products online, making it a convenient option for many investors.

Dimensional Fund Advisors' products are only available through financial advisors and institutional clients.

This limited availability means that individual investors may not be able to access Dimensional Fund Advisors' products directly.

If you're looking to diversify your portfolio, you may find that Vanguard doesn't offer a fund or ETF for every asset class you're interested in.

For example, Vanguard doesn't offer a fund or ETF for international small value or emerging markets value, which might be a gap in their offerings.

In these cases, it's worth exploring other options like the Avantis ETF, which can help you fill the gap in your portfolio.

You can use the Avantis ETF to gain exposure to international small value or emerging markets value, among other asset classes.

Brokerage services are a must-have for investors who want to buy and sell individual securities.

Vanguard offers brokerage services that provide access to third-party research and tools to make informed investment decisions. This is especially helpful for those who want to stay on top of market trends and make smart investment choices.

Investors can use these services to trade stocks, bonds, and other securities with ease.

Many DFA funds have higher minimum investment requirements compared to some other mutual funds or ETFs.

If we compare Vanguard with iShares ETFs, the performance is also very similar.

DFA funds often have higher minimum investments, which can be a barrier for some investors.

BlackRock or HSBC (UK) index funds also have similar performance to DFA funds.

This means that investors may have similar options across different fund managers.

Smart beta funds, like those from DFA, can vary significantly in terms of their investment objectives and portfolio holdings.

These funds often track unique indexes or use specific methodologies to achieve their goals.

This can be beneficial for investors who want to target specific factors, such as value or momentum.

However, it also means that investors need to do their research to choose the right smart beta fund for their needs.

Ultimately, investors should consider their individual goals and risk tolerance before investing in any fund.