Vanguard Small Cap Value Index Fund (VISVX) Vs DFA US Small Cap Value (DFSVX)
Assuming you’ve decided small/value tilting is for you (I won’t discuss whether or not you should here. Check out my previous article on the subject), how exactly do you go about implementing your plan? After all, there’s sometimes a pretty big gap between theory and practice when it comes to investing – we still don’t have any reasonably-cheap commodity index funds, for crying out loud!
Which specific funds should you use to small/value tilt your portfolio? In principle, any reasonably-priced small-cap value fund will do. I’ve narrowed it down to just two candidates, though, mainly because there really aren’t all that many reasonably-priced small-cap value funds out there. Remember that investment costs are the single most important predictor of a mutual fund’s future performance. To that end, I’ve chosen to focus on two of the lowest-cost options in a generally-expensive market segment. As usual, it comes down to Vanguard vs DFA.
Vanguard Vs Dimensional Fund Advisors
Each of these funds has its own distinctive advantage. Both are more than adequate, but your specific situation will determine which is best for you. I suspect the vast majority of my readers, being DIYers, will do better with the Vanguard fund, which is what I use personally in my Roth IRA.
Fund data provided by Morningstar (if you don’t already have a free Morningstar account, I highly recommend you register for one
) and is accurate as of the publish date.
Vanguard Small Cap Value Index Fund (VISVX)
Expenses: 0.24%
Avg Market Cap: $1.399 billion
This is a great fund. I use it. It’s the cheapest small-value fund I know of at 0.24% and it’s been surprisingly tax-efficient (not that I recommend you own it in a taxable account), but is it the best fund to give you exposure to the small and value risk factors? No, it’s not. With an average market cap of $1.399 billion, this fund just isn’t really all that SMALL. It’s pretty small, but I would really prefer something with just a bit more micro cap exposure, ideally with an average market cap below $1 billion. Still, it’s a dirt-cheap fund, and that counts for a lot in this segment of the market.
DFA US Small Cap Value (DFSVX)
Expenses: 0.52%
Avg Market Cap: $877 million
Does the difference just jump out at you? The DFA fund is much smaller and more value-y with an average market cap less than two thirds that of the Vanguard fund. All else being equal, this would be the obvious choice for small-value exposure. Of course, all else is rarely equal. The fund is a better pure small/value play, but it also has an expense ratio of more than twice Vanguard’s offering. While that sounds like a lot, it’s only 0.28% more in absolute terms, which is more or less reasonable.
Unfortunately, the higher costs don’t stop at the expense ratio. DFA, for perfectly legitimate reasons I mostly agree with, has decided to only market their funds through approved financial advisors. Simply put, you can’t buy a DFA fund without a financial advisor. This obviously adds a significant layer of extra expenses.
Which Should You Choose?
While there are some good low-cost DFA advisors out there, the extra expenses involved just make DFA too expensive for my taste. Hence, I opted for the Vanguard Small Cap Value Index Fund even though I do believe the DFA fund is technically superior. I don’t trust the small/value premium to be large enough going forward to overcome the extra costs. Historically it has been, but historical premiums have a nasty habit of getting smaller as those asset classes become more investable.
However, if you already work with a financial advisor and have no desire to manage your portfolio without one and you’re determined to small/value tilt, I would recommend going with DFA over Vanguard in this case. But hey, let’s be honest: in the end, it probably won’t matter all that much.
Oh, and I’ve heard vague hints there are DFA advisors out there who will give you access to these funds for close to free, but I’ve never actually come across one. If you find one, could you please let me know?
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Interesting look at small-cap ETFs. I don’t trade funds for clients, but when someone seeks financial advice, but would rather invest on their own, I often suggest value small-cap ETFs as a good way to get equity exposure.
I would suggest to Vanguard that an ETF with an average market cap of $1.4 billion is actually a mid-cap fund, but otherwise that does look like a solid fund. I put small caps between $400 million and $1 billion, and find that’s often a sweet spot for investing; these companies are big enough to withstand adverse external conditions, but small enough to slip between the cracks for good value.
Average cap is a big deal. That said, I’d also say an important statistic you should list and consider is how correlated these are to the big indices like SP500. After all, diversity is the whole point, right?