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Why I prefer Dimensional to Vanguard (in most cases)


By Stuart Ritchie - April 29, 2020

 As a super-fan of low-cost, passive or index investing, there is no company I hold in higher regard than Vanguard.

There’s also no businessperson I admire more than its founder John Bogle

I am proud that one of our top graduates now works in the Vanguard nerve centre.

And I am a proud “Boglehead.”

So when I say that I prefer Dimensional Fund Advisors (“Dimensional”) to Vanguard, know this is not treachery...

But an insight based upon over 30,000 hours of personal experience and centuries of wisdom from peer planners around the world.First, a reminder...

Given our independent structure, we are free to invest our clients’ money – and our own – in whatever funds we believe to be the best. 

We are not beholden to any fund company.

And never will be.

Our investment philosophy is based upon reviewing academic evidence.

It allows us to sift the vast wasteland of mutual fund and ETF companies...

Immediately eliminating most because they have excessively high costs, trade too frequently, or are not diversified enough.  

Nearly all of the remaining options are “traditional” index funds or ETFs, which have the mandate to track an underlying benchmark. 

While there are several good index funds and ETF companies (SPDR, Schwab, iShares, etc.)...

We believe Vanguard is the best (in those markets where it is accessible), lowest-cost and most reliable. 

The market agrees, as Vanguard has experienced record inflows making it the world’s largest mutual fund company. 

This is great news for investors everywhere.

Traditional index funds sit atop the huge pile of available mutual funds.

Vanguard sits atop the smaller group of traditional index funds. 

And we believe Dimensional sits even higher.

There are several reasons for this:

  • Academic grounding. Dimensional was founded by leveraging the research of Nobel Laureate Eugene Fama (who coined the term “efficient market”) and his partner in academia, Kenneth French. Other top academics (such as Nobel Laureate Robert Merton) remain on staff, while others (such as Nobel Laureate Myron Scholes) serve as directors. Dimensional’s investment methodology is subject to a level of academic rigour that no other firm can match.
  • Passive, but not indexed. Dimensional funds are “passive,” in that they recognise markets are largely efficient and trying to pick winning stocks is fruitless. However, they are not tethered to any specific benchmark (e.g. S&P 500 or Russell 2000). Traditional index funds attempt to mimic these benchmarks as closely as possible. By definition, this goal restricts their flexibility in fund construction and requires trading stocks that are affected by benchmark “reconstitution” (elimination of some companies and addition of others), which has proven to be a disadvantageous time to trade. By electing not to strictly index, Dimensional is free to construct their funds in a manner that allows them to capture the returns of a given asset class without the necessity of trading the underlying stocks on the same day as everyone else, thereby reducing trading costs.
  • Minimising costs. Unlike most fund families, Dimensional actively promotes the importance of minimising investment costs.  They walk the walk by offering funds with low annual expense ratios (as of this writing, the Dimensional funds we own for clients have expense ratios ranging from 0.12% to 0.45% – slightly higher than Vanguard’s, but much lower than the industry average) and by carefully controlling costs within the fund (by trading patiently and infrequently).
  • Small cap and value tilting. Informed by the evidence-based concepts that small cap stocks should outperform large cap stocks over time and that “value” stocks should outperform "growth" stocks, Dimensional funds are intelligently designed to capture these risk premiums. Dimensional makes it easy for advisers to “tilt” their clients’ portfolios towards small cap and value stocks – holding disproportionately more than a traditional market cap-weighted portfolio.
  • Securities lending. Mutual fund managers have the option to lend their stocks to short-sellers, and receive a tiny lending fee for doing so. This fee can either be retained by the fund company or passed on to the funds (thereby increasing the return to fund holders). Most fund companies do some combination of the two. I know of only two that pass all of their net lending fees to fund holders: Dimensional and Vanguard.
  • Smarter bond funds. Dimensional’s bond funds are similarly “passive” in not attempting to pick winning individual bonds, while also not tracking a benchmark. This framework allows Dimensional to employ an evidence-based “variable maturity” bond strategy, holding longer maturity bonds only when investors can expect to be reasonably rewarded (i.e., when the yield curve is steep). When the yield curve is flat or inverted, Dimensional shortens the duration of its bond funds.

Dimensional versus Vanguard scale bg

If Dimensional is so great, you may be asking, why haven’t you heard of it? 

We explain this here.

But, the answer is that Dimensional does not market its funds directly to individual investors. 

Its funds can only be purchased by investors working with financial planners who have demonstrated expertise in the implementation of evidence-based investment strategies. 

Dimensional believes the evidence which is ironically supplied by Vanguard that passively minded advisers do a good job of keeping their clients disciplined. 

Knowing its fund holders are focused on the long-term allows Dimensional to implement all of the desirable strategies described above.

Beliefs aside, we don’t have the option to buy Dimensional funds in every client account. 

When Dimensional is not an option, we are perfectly comfortable owning traditional index funds – specifically Vanguard funds and iShares where Vanguard are not available. 

And in rare circumstances, we prefer Vanguard to Dimensional for specific clients in specific situations. 

While Dimensional remains our default choice, we own whatever makes the most sense for the client’s needs.  

If you’d like to read more about Dimensional’s story, we highly recommend this 2014 Barron’s cover story

If you would like to learn more about the historical fund performance of Dimensional’s funds, including how they stack up to Vanguard’s, please contact us.

Lastly, while this post reads as a glowing endorsement for Dimensional...

Remember that it simply reflects our preferences, not any formal ties or allegiances to the firm. 

Our loyalty is only to our clients. 

If at any point we believe that a different fund company offers a better option for our clients, we would excitedly incorporate it.  

In the meantime...

We feel fortunate to be able to invest our clients’ money – and our own – in Dimensional funds.

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