There is overlap between premiums, as seen in Figure 21. When you look at the co-variation of the profitability premium with the value premium, there’s a lot of common ground, and the rest of the impact is a bit of a growth tilt that will offset your pure value bets. Low beta is negatively correlated with value and positively correlated with quality. Most investors don’t realize that if you want to exploit all the factors, they are not going to be additive, because the premiums are not independent of each other. You can’t get full “market” premium plus the full “small cap” premium plus the full “value” premium—that would sum to more than 25 percent per year (Figure 22)!
DFA’s unusual distribution strategy can keep its funds out of reach for investors with assets too low to pique the interest of most advisors. Similarly, there have always been advisors who want to work with DFA, but there was no shortcut to the advisor-approval process. DFA also has never worked with full-service brokerages, nor has it been available to 401(k) platforms.
Although the firm’s record is referred to by some as “the most impressive track record in investing,” systematic risk factor approaches—value, small-cap, momentum—are comparatively straightforward for investors to understand and access. DFA funds are built using only a four-factor model, and really, the only tool required is a spreadsheet. 7
Carhart, M. M. (1997). “On Persistence in Mutual Fund Performance.” The Journal of Finance 52: 57–82.
2 The sum of the weights must equal 100% and, to keep things simple, we require all weights to be positive which means conceptually that no index funds are sold short.
3 We used Excel’s slope function to point the HmL from the Tuck Library to the HmL return stream of DFA and then to the HmL of a mix of funds.
4 At the time of Vanguard’s change announcement, the No. 3 U.S. ETF provider went to great lengths to downplay any differences in returns between the MSCI indexes and the new enlisted ones. The new CRSP indexes, created by a research center of the University of Chicago’s Booth School of Business, were designed to be replicated by an ETF or index fund with great effort to minimize trading and front-running.
5 Vanguard and BlackRock offer identical Small-Cap 600 Value ETFs. Vanguard is cheaper (0.2 percent versus 0.3 percent) but BlackRock has more assets ($3.2 billion versus $.076 billion). BlackRock’s ETF is arguably more liquid and cheaper to trade, which is important, since small-caps are—as a group—expensive to trade, but it’s unclear which is “better.”
6 Momentum is a factor affecting returns that was informally added by DFA in 2004, but it’s technically not considered a “dimension” of equity returns by the company, because there’s no real explanation for why returns should be higher.
7 The authors are working with Silicon Cloud Technologies, LLC which will offer software at PortfolioVisualizer.com that computes these factors automatically.