DFA vs. Vanguard

The debate of Dimensional Fund Advisors (DFA) vs. Vanguard is a debate of competing philosophies. While both offer passively-managed funds, they each follow a distinctive approach. Both tend to be "best in class" at what they do.

Vanguard offers index mutual funds and exchange-traded funds that track commercial benchmarks (indexes). The primary objective of each Vanguard fund is to replicate the performance of a specific benchmark, such as the S&P 500 Index or the MSCI US Broad Market Index. Low cost and low tracking error are important factors determining their success. For investors looking to replicate commercial benchmark returns at a very low cost, Vanguard offers a great solution. Their funds are available on a direct basis - no advisor required for access.

Like conventional index funds offered by Vanguard, Dimensional Fund Advisors (DFA) seeks to capture market rates of return through broad diversification and low cost. But instead of tracking commercial benchmarks, DFA looks to target systematic risk factors with greater precision. Avoiding a low tracking error mandate may provide DFA with a trading advantage. By not having the same urgency to trade as index funds and actively-managed funds, DFA is positioned to be a provider of liquidity to those funds. This position of strength can result in paying lower average prices for securities. DFA also tends to be a more aggressive lender of securities, producing income that can drive costs lower than what the stated fund expense ratio implies. DFA offers funds on a direct basis to institutional investors or to clients of approved investment advisors.

The decision to use DFA or Vanguard (or both) depends on the structure and desired risk exposures of a portfolio. Neither is the universally-correct answer.