DFA Fund Returns vs Benchmarks:

Do DFA Funds Yield Returns Similar To Appropriate Benchmarks?

Facts: Indexes have no costs, but funds do. Most funds underperform their benchmark (BM) at a minimum by ther expense ratio and some additional amount related to turnover.

First, consider the returns of five Domestic DFA funds (inception to December 2012):

• DFA US Micro Cap (DFSCX) vs. CRSP 9-10 Index
• DFA US Small Cap DFSTX) vs. CRSP 6-10 Index
• DFA Small Value (DFSVX) vs. Fama-French Small Value Index Ex-utilities
• DFA Large Value (DFLVX) vs. Fama-French Large Value Index Ex-utilities
• DFA Large Company (DFUSX) vs. S&P 500 Index

Table 1 Shows The Following:

DFA funds outperformed their benchmarks by an average of 0.67 percent. Further, if one exclude and holds the large value fund as an outlier, then the average underperformance of the other four funds only amounts to 0.04 percent. Finally, the average expense ratio equals 0.34 percent. But if securities lending revenue is taken into account, then the average "effective" expense ratio falls to 0.22 percent.

Second, consider the returns of four International DFA funds (inception to December 2012):

• DFA Large Cap Int’l (DFALX) vs. MSCI EAFE Index
• DFA Int’l Value (DFIVX) vs. MSCI EAFE Value Index
• DFA Int’l Small Co (DFISX) vs. MSCI World ex US Small Cap Index (net div)
• DFA Int’l Small Cap Value (DISVX) vs. MSCI EAFE Small Value Index (net div)

Table 2 Shows The Following:

These four DFA funds returned the cost of their expenses and outperformed their benchmarks by 0.60 percent. Note that the majority of funds fail to do the aforementioned.The gross expense ratio for the DFA funds averaged 0.51 percent. After accounting for their securities lending revenue the "effective" expense ratio for the DFA funds amounted to 0.33 percent.

Third, consider the returns of three Emerging Market DFA funds (inception to December 2012): Note that emerging market funds are more expensive to operate than most funds.

• DFA Emerging Mkts (DFEMX) vs. MSCI Emerging Mkts Index (gross div)
• DFA Emerging Mkts Value (DFEVX) vs. MSCI Emerging Mkts Value Index (gross div)
• DFA Emerging Mkts Small (DEMSX) vs MSCI Emerging Mkts Small Index (net div)

Table 3 Shows The Following:

These three DFA Emerging Market funds outperformed their respective benchmarks by 3.45 percent, overcoming a gross expense ratio that averaged 0.68 percent. After adjusting for the securities lending revenue the "effective" expense ratio was 0.55 percent.

Conclusion

Bottom line, DFA has shown that a properly crafted and passively managed fund is capable of delivering the returns that investors are looking for. With DFA funds, stock investors, whether domestic, international or emerging, earn the returns of the asset classes in which they invest. Casu clausa!