Episode 351 – DFA vs Vanguard
The Rational Reminder Podcast
Exploring Multi-Factor Models and Systematic Premiums
This chapter explores the transition from the Capital Asset Pricing Model to multi-factor models, emphasizing the contributions of Fama and French. It discusses systematic premiums like size, value, and profitability, and illustrates a firm's strategic approach to leveraging multiple risk factors for improved returns.
Dimensional Fund Advisors (DFA) and Vanguard have intersecting histories rooted in the development of the first-ever index fund. Vanguard's market-cap weighted index funds have been nothing short of revolutionary and they became synonymous with sensible investing for many good reasons, but Dimensional took implementing the ideas from academic finance a few steps further, leading to their own deserved acclaim. In today’s episode, Ben and Dan analyze over 30 years of history between DFA and Vanguard, from their founding and relationship to their rise as global leaders in asset management. We discover how their approaches to foundational finance theory differ, whether diversification is mostly semantics, and how DFA and Vanguard compare to one another over 25 years of matched US-domiciled mutual funds. We also discuss which approach is easier to implement, essential insights for fund advisors, DFA’s downsides despite its long-term outperformance of the Vanguard 500, and an uplifting cancer update from Ben in today’s After Show. For practical investment takeaways, tune in today!
Key Points From This Episode:
(0:01:14) Unpacking DFA and Vanguard’s history and relationship.
(0:03:10) Mac McQuown and the birth of index funds at Wells Fargo in 1964.
(0:07:48) How DFA and Vanguard became global leaders in asset management.
(0:10:43) Understanding DFA and Vanguard’s approach to foundational finance theory.
(0:19:34) The semantics of diversification.
(0:22:22) Comparing 25 years of matched Dimensional and Vanguard US mutual funds.
(0:33:36) Which fund advisor’s approach is easier for others to implement and why.
(0:39:30) How DFA has outperformed Vanguard in the long run (with downsides to consider).
(0:43:09) Recapping today’s conversation: what every fund advisor needs to know.
(0:46:41) The After Show: Ben’s cancer update, Dan as co-host, and listener reviews.
Links From Today’s Episode:
Meet with PWL Capital — https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582 Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Dan Bortolotti on LinkedIn — https://www.linkedin.com/in/dan-bortolotti-8a482310/
Canadian Couch Potato — https://canadiancouchpotato.com/
Dimensional — https://www.dimensional.com/
Vanguard — https://investor.vanguard.com/
‘Remembering John “Mac” McQuown, Whose Curiosity Drove a Life of Innovation’ — https://www.dimensional.com/dk-en/insights/remembering-john-mac-mcquown-whose-curiosity-drove-a-life-of-innovation
‘Episode 182: John “Mac” McQuown: The Data Will Sort That Out’ — https://rationalreminder.ca/podcast/182
Wells Fargo — https://www.wellsfargo.com/
‘Episode 131: David Booth: The First Index Fund, Competing Fiercely, and Keeping it Simple’ — https://rationalreminder.ca/podcast/131
William F. Sharpe | Stanford University — http://web.stanford.edu/~wfsharpe/bio/bio.htm
‘Episode 316 - Andrew Chen: "Is everything I was taught about cross-sectional asset pricing wrong?!"’ — https://rationalreminder.ca/podcast/316
Marco Salmon on LinkedIn — https://www.linkedin.com/in/marco-a-salmon-a63512284
Books From Today’s Episode:
The Incredible Shrinking Alpha — https://www.amazon.com/dp/0857198246
Papers From Today’s Episode:
‘The relationship between return and market value of common stocks’ — https://doi.org/10.1016/0304-405X(81)90018-0
‘Market Efficiency’ — https://www.jstor.org/stable/246460
‘The Cross-Section of Expected Stock Returns’ — https://doi.org/10.2307/2329112
‘A Five-Factor Asset Pricing Model’ — https://dx.doi.org/10.2139/ssrn.2287202
‘The Performance of Mutual Funds in the Period 1945-1964’ — https://dx.doi.org/10.2139/ssrn.244153
‘The Death of Diversification Has Been Greatly Exaggerated’ — https://ssrn.com/abstract=2998754
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