Dimensional Funds Advisors – should you buy their ETFs?

by | Last updated Dec 2022 | Investing

Dimensional Funds Advisors featured image

Dimensional Funds Advisors Executive summary

  • Dimensional Funds Advisors is a large money manager who offers ETFs and mutual funds of many different strategies, from equity, to fixed income, to real estate and more.
  • They only offer their funds through financial advisors and have higher expense ratio than other ETFs with similar strategies.
  • A rapid, very quick look into their returns did not provide enough evidence that they beat relevant benchmarks enough for me to get excited about looking further into investing with them.

Quick basics about Dimensional Funds Advisors

Dimensional funds advisors is one of the largest money managers at the world. They currently manage over half a trillion dollars across over 150 different funds and strategies.

They invest money for both individual investors and for institutions and across a broad range of strategies, ranging from fixed income to equities to real estate.

Dimensional Funds Advisors are most famous for being strict adherents to factor investing (see below for an explanation of what factor is exactly if you’re not familiar)

They were early adopters of factor investing and many of their funds and strategies to use this as their core strategy/approach to investing.

However, as with most active management strategies, the excess returns above a market return from factor investing have faded over time.

Why is this?

When people learn about successful active investing strategies, they begin to use those approaches as well. Since everyone is now able to use the same strategy, it becomes no longer effective (e.g., people will keep bidding up the price of securities they know are valuable up to the point of its value through the strategy). If many people are doing this, very few or none of them end up with excess value.

This leaves Dimensional Funds Advisors in the tricky position of a being a famous investment firm, with hundreds of billions of dollars under management, but pursuing an old strategy that probably doesn’t work as well as when it was first invented.

Another problem with them is that they only ‘distribute’ their investments through financial advisors, instead of directly to individual investors, like other funds such as Fidelity and Vanguard. Since, like all products and services, everyone along the distribution chain needs their cut to incentives them to participate, this increases the price for the end customer – in this case individual investors.

Ok – so what?

This leaves us with the critical question – do Dimensional Funds Advisors funds, investments, and strategies produce excess returns above what you could achieve from just a simple, low-cost broad index funds enough to justify the extra cost?

With 150 different funds active, a rigorous, full academic analysis of that question is beyond the scope of this introductory article.

But, we can endeavor to take a quick look and see if there might be enough outperformance to investigate further.

See the next section below for that quick analysis.

Does Dimensional’s performance beat the market?

A full, rigorous analysis of Dimensional Funds Advisors performance is beyond the scope of this article (and would be a massive undertaking). After all, they have over 150 funds, all with slightly different strategies at writing.

But I wanted to take a quick look and see if they have exceptional performance worth further exploring.

To start, I looked at the top performing (since inception) and worst performing Dimensional Funds Advisors EQUITY funds which have existed for at least 10 years.

I excluded several of their funds which are more recent than that, since they haven’t really been through enough cycles to know how they will perform over time. Sure they might happen to perform better than a benchmark over a short time, but if their new, it’s hard to have enough data to judge how they might have performed over time, without doing a full backtest analysis, which is beyond the scope of this quick-look check.

I picked the top 2 and bottom 2 funds fitting this criteria and compared them against Vanguards S& 500 ETF (VOO). Of course, a proper analysis would compare them to their more specific and relevant benchmarks, but again, I’m just doing a quick look here to compare what would happen compared to if I just took the easy route and clicked a couple buttons to dump the money into an easy, low cost S&P 500 index.

Here are the results:

Our benchmark – VOO – is the blue line

Dimensional Funds Advisors ETFs vs. VOO (S&P 500 index) graph

Only one out of the three funds outperformed VOO – DUSLX, their US large cap growth fund. As you can see, even that fund didn’t outperform by much.

While the S&P500 achieved a CAGR of 13.30% over the period at an impressive 0.88 Sharpe and 1.37 Sharpe ratio, most of the selected Dimensional Advisors Funds would have left you with substantially less. Their best performer, slightly beat the VOO and grew at a CAGR of 14.22%, at a Sharpe of 0.93 and a Sortino ratio of 1.52.

This doesn’t leave a lot of confidence that investing with DFA vs. just dropping money into a super low cost S&P500 index fund will generate a greater return.

Going a little deeper

But, the way we did this analysis so far isn’t completely fair to DFA. Comparing the S&P500 to some of their more specific strategies above isn’t the exact right way to do a comparison. After all, when constructing a portfolio, to diversify risk, you will want to have funds pursuing different strategies, as some of Dimensional’s are above.

To see if a fund manager is worth paying for, a more proper analysis will look to see if their fund beats the relevant strategic benchmark their competing against, over time and net of fees.

So let’s go one click deeper and take a look and see if these funds are outperforming their benchmarks.

Again, for simplicity and since this is a quick look, not an in-depth, academically rigorous analysis, we’ll just continue to use the 4 EQUITY funds we selected above – two of their best performers and two of their laggards.

The other funds selected for comparison, actually significantly underperformed via the benchmark we selected.

One click deeper on performance, this time vs. relevant benchmarks

1.     DUSLX vs. IWF (DFA’s US Large Cap Growth fund vs. Russel 1000 Growth index)

Let’s start with our best performer from above, Dimensional Funds’ Advisors large cap growth offering – DUSLX vs. its benchmark, the Russel 1000 Growth Index (note: we use iShares offering for comparison here – IWF)

DUSLX vs. IWF stats

DUSLX vs. IWF graph

These results are a bit disappointing. An investor would have been slightly better off just investing in the growth index instead. This does not build confidence that Dimensional Funds Advisors have some kind of ‘secret sauce’ to beat the market or the benchmark that would justify their fees.

2.     DFSCX vs. IWM (DFA’s US Micro Cap fund vs. Russel 2000 index)

Next up a brighter spot for Dimensional, looking at their Micro Cap fund (note: we use iShares offering for comparison here – IWC)

DFSCX vs. IWM stats

DFSCX vs. IWM graph

Here they actually beat their benchmark quite substantially. This might be something to look into more carefully if you’re looking for micro cap exposure. You can see Dimensional’s Sharpe and Sortino ratios are well above the benchmark, and their CAGR of 8.19% easily beats the benchmark’s 5.88% over the time period.

3.     DFEPX vs. competitors (DFA’s emerging growth value fund vs. several competitors)

Moving into evaluating two of DFA’s worst performers, we don’t see much of a surprise here that they underperform their benchmark (represented here by EFV) as well as several relevant competitive funds (ZEM.TO and IEFA)

DFEPX vs. competitors stats

DFEPX vs. competitors graph

4.     DFIPX vs. VGTSX (DFA’s international value fund vs. Vanguard Total International Stock Index)

Yet again, disappointing results here, as Dimensional Funds Advisors offering fails to beat it’s benchmark

DFIPX vs. VGTSX stats

DFIPX vs. VGTSX graph

Note: Performance analysis and visualizations provided by portfoliovisualizer.com

Wait, so what is factor investing exactly?

Factor investing is a very famous theory is finance academia that through evaluating securities according to particular “factors,” an investor can create a model that will find higher expected returns than the overall market, potentially with lower volatility of those returns

The theory was released in 1992 by professors Fama and French, who developed a 3-factor investing model. Their hypothesis was that the three factors of market risk, size risk, and price (value) are the primary determinants of equity returns. The model’s uses these “factors” to output what an investor should be willing to pay for a security.

Note that Dimensional Funds Advisors refers to these “factors” as “dimensions.”

Since then investors have gone on to create all sorts of models with many more than three, and many different combinations of factors.

In 2012, Fama, who had since joined Dimensional Funds Advisors as a Director, further added the dimension of profitability as critical driver of higher expected returns. Then in 2014 both Fama and French released their five factor model, adding internal investing returns (e.g., how a company re-invests their profits on profitably, growing internal projects) as a driver.

There’s a lot more to it, that’s just the quick version

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Wrap up: Where and how would you invest instead?

While we only conducted a quick-look here, I didn’t find anything that has me rushing to invest with Dimensional Funds Advisors or to do a deeper, more rigorous dive to see if they are really beating their benchmarks through some kind of investment system that beats the market.

Instead, I will simply keep investing in a diversified portfolio of boring, low cost index funds for slow, but consistent wealth accumulation.

Editor's Note:

At Personal Finance Guru, we want to help you maximize your lifestyle through personal finance. You can trust the integrity of our independent financial advice. Our opinions our own and have not been provided, review, approved, or endorsed by any advertiser or financial product provider. To support and grow the site, however, we may receive compensation from the issuers of some products.

Author bio:

Cody Beecham

Cody Beecham

Founder/Owner/Editor/Author

Cody is the founder and owner of Personal Finance Guru. His day job is as a management consultant at one of the Top 3 firms (think Mckinsey, Bain), where he advises Fortune 500 C-suite clients on their most important and pressing business problems. He completed his business education at Harvard Business School. 

After seeing the lack of personal finance education for regular people, Cody started the website with the mission to provide everyone access to information that will help them achieve their financial goals.

Cody approaches personal finance from a maximalist perspective, shunning typical advice around simply not buying a cup of coffee instead of more effective methods like investing in yourself to quickly grow your income. 

He believes in saving money and investing for the future, but he also knows that you need to enjoy life today. That’s why Cody approaches money with a sense of humor and a positive attitude. He knows that if you’re not having fun while you’re growing your wealth, then what’s the point?

Cody approaches life with the same gusto that he brings to personal finance. He loves to travel and experience new cultures, and he is an avid reader and learner. He also enjoys playing sports (especially tennis) and spending time with his family and friends.