DFA under-performs S&P 500

[pulpsnatcher]

My DFA accounts, as you would imagine, under-performed the S&P 500 in the first quarter of 2019.  As I transition to index funds, what studies support index fund performance vs. managed funds over the long term. My first quarter of 2019 is one REAL LIFE study.  I am sure this has been answered a gazzilion times somewhere.

[jacoavlu]

a quarter or a year or even 3 years is nothing in terms of comparison of returns, but that's beside the point. The fact of active management average underperformance, net of fees, relative to an appropriate index is simple math

https://web.stanford.edu/~wfsharpe/art/active/active.htm

[CordMcNally]

It can actually be a little tough to find good information because many actively managed funds don't last very long. Just curious, why do you need studies? You don't need studies when the actual data is at your fingertips.

[Peds]

If they had outperformed...what then?

[spiritrider]

First, you should understand what you own. DFA funds are still passive investment mutual funds. They do not market time and they do not pick winners and losers. While they don't emphasize the term index funds, they really are "quantitative" index funds. In other words, they use computer models rather than market capitalization for weighting. The difference is they have their "secret sauce" of "factor" investing, otherwise known as "tilting", primarily to small and value.

The reason that you think "DFA" is under performing the S&P 500 is you are comparing apples to oranges. I have no idea what their tracking error to their passive investing indexes. Personally, I have never been a fan of tilting. It works until it doesn't.

[ajm184]

Don't have a study to link.  A couple of points:

a. DFA is not a bad fund management company.  Lower costs for its funds, offset by needing to go through financial advisors to get access to the fund family (with its associated cost).  If your choice is to move away from DFA because you want to DIY, that is a viable reason.  Moving away for one quarter of under-performance is not.

b. Not sure if the S&P 500 is a viable benchmark to gauge your 'underperformance'.  S&P500 is currently fairly highly weighted towards technology stocks, so as benchmark is going to be challenging for DFA to outperform in an overall market upswing with factors it uses.

c.  DFA uses 'factor investing' for its customers, tending to overweight small caps as its 'factor'.  DFA's approach has been shown to be viable for long periods of time (20 odd years).  Wheather viable outperformance against the MF & advisor fees, I am not sure.

[Tim]

Survivorship bias is real. Some discussion and data is attached including DFA and Vanguard stuff. All tied up with a bow. By the way, please don’t confuse one quarter of your holdings as anything else than one quarter results of your holdings. Good luck.

https://thebamalliance.com/blog/how-survivorship-bias-happens-adjusted-fund-rankings/

[pulpsnatcher]

Had these funds for several years thru my advisor.  Purchased well before WCI.  Certainly I am not overly concerned about the first quarter of 2019 being off by some 3%, but the fees will never stop.  I admit, I am not fully aware of the of the factor DFA uses.  As the community already knows, it grows old watching AUM fees being deducted from account.  I was just curious about studies vs. anecdotal thought, as I transition to index investing.

[Andrew Musbach]

Don't confuse the decision of holding/selling DFA investments with the decision of firing your advisor. Yes, you can only invest in DFA funds through an approved advisor in personal investment accounts (outside of some 401k plans, 529 plans, variable annuities). However, you can still fire your advisor, stop paying AUM fees and still hold your existing DFA funds.

So without the AUM fees mixed in your decision, you can compare DFA v. Index funds. The expense difference will, for most funds, be less than a ~.25% difference to Vanguard.

To the point of everyone else, be careful about making a decision based on short-term performance. This is especially true if you would have to incur taxes to make the switch to Vanguard index funds. It's up to you if you believe in the philosophy of DFA, but you'd be a great example of why they'd say the factor "premiums" will exist, because it's hard to stick with the factor exposure long enough to take advantage of the "premiums". Can't blame you for being frustrated by that though because the factor "premiums" certainly have not been around for a while.

[saildawg]

I recommend reading "A random walk down wall street" for explanation of what you are getting with DFA funds.  It does a good job explaining them, then you can decide yourself.