Why Vanguard & Dimensional Fund Advisors?Submitted by JMOD Financial Services, LLC on July 19th, 2017
Every now and then, we’re asked why we almost exclusively use Vanguard and Dimensional Mutual Funds & Exchange Traded Funds (ETFs) to build investment portfolios. The answer comes down to financial science.
A 2016 study by The Wall Street Journal found that Vanguard was second only to Fidelity in familiarity by respondents who were asked, “How familiar are you with each of the following mutual fund/ETF companies?” When respondents were then asked, “How would you rate each company’s overall reputation?” Vanguard was second to none.
Why is Vanguard so popular? It’s simply about performance and cost. As of December 31, 2016, Vanguard’s average expense ratio is 0.12% and the industry average expense ratio is 0.62%.1 As of March 31, 2017, 94% of all Vanguard funds outperformed their peer averages.2
In August 1976, the world’s first index mutual fund was created by Vanguard. For the first time, it allowed the average investor to buy and hold the broad market at an extremely low price. And although the indexing strategy was supported by academic research, the Wall Street establishment dismissed it. To this day, Wall Street still attempts to lure investors to outwit the markets…with additional fees, of course.
But why do we like Dimensional too? First, for the same reasons we like Vanguard: performance and cost. But, also, its use of rigorous academic research to implement investment strategies have driven the bottom line. In fact, while only 15% of all the equity and fixed income funds that were around in 2000 beat their benchmark (i.e., index) over the 15-year period, ending in December 31, 2015, 82% of all Dimensional equity and fixed income funds, during that same period, outperformed their respective benchmarks.3
Why isn’t Dimensional more popular then? One, they don’t advertise. Two, Dimensional funds are not available directly to the retail investor.
JMOD Financial Services is among a very limited group of investment advisor representatives able to offer Dimensional funds. Our mission is to be your financial advocate. So, if the science doesn’t support it, we don’t follow it. If the numbers don’t add up over the long-term, we don’t invest in it. We are here to help you implement allocation, rebalancing, income draw-down, and other strategies that can optimize your retirement goal. And, we only utilize appropriate investments to implement those strategies.
1As of December 31, 2016, Vanguard's average expense ratio is 0.12% and the industry average expense ratio is 0.62%. All averages are asset-weighted. Industry averages exclude Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2016.
2For the 10-year period ended March 31, 2017, 9 of 9 Vanguard money market funds, 51 of 54 Vanguard bond funds, 23 of 23 Vanguard balanced funds, and 124 of 135 Vanguard stock funds—for a total of 207 of 221 Vanguard funds—outperformed their Lipper peer-group average. Results will vary for other time periods. Only mutual funds and ETFs (exchange-traded funds) with a minimum 10-year history were included in the comparison. Source: Lipper, a Thomson Reuters Company. The competitive performance data shown represent past performance, which is not a guarantee of future results.
3US-domiciled mutual fund data is from the CRSP Survivor-Bias-Free US Mutual Fund Database, provided by the Center for Research in Security Prices, University of Chicago.
Certain types of equity and fixed income funds were excluded from the performance study. For equities, index funds, sector funds, and funds with a narrow investment focus, such as real estate and gold, were excluded. Index funds, money market funds, municipal bond funds, and asset-backed security funds were excluded from fixed income.
Funds are identified using Lipper fund classification codes. Correlation coefficients are computed for each fund with respect to diversified benchmark indices using all return data available between January 1, 2001, and December 31, 2015. The index most highly correlated with a fund is assigned as its benchmark. Winner funds are those whose cumulative return over the period exceeded that of their respective benchmark. Loser funds are funds that did not survive the period or whose cumulative return did not exceed their respective benchmark.
Expense ratio ranges: The ranges of expense ratios for equity funds over the five-, 10-, and 15-year periods are 0.01% to 4.90%, 0.01% to 4.72%, and 0.07% to 4.44%, respectively. For fixed income funds, ranges over the same periods are 0.02% to 3.09%, 0.06% to 2.67%, and 0.03% to 3.66%, respectively.
Portfolio turnover ranges: Ranges for equity fund turnover over the five-, 10-, and 15-year periods are 1% to 1,535%, 1% to 1,388%, and 2% to 2,318%, respectively.
Benchmark data provided by Barclays, MSCI, Russell, Citigroup, BofA Merrill Lynch, and S&P. Barclays data provided by Barclays Bank PLC. MSCI data © MSCI 2016, all rights reserved. Russell data © Russell Investment Group 1995–2016, all rights reserved. Citigroup bond indices © 2016 by Citigroup. The BofA Merrill Lynch index is used with permission; © 2016 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation. The S&P data is provided by Standard & Poor’s Index Services Group.
Benchmark indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
Investors should consider the investment objectives, risks, charges and expenses of the Mutual Fund and Exchange Traded Fund (ETF) carefully before investing. The prospectus and, if available, the summary prospectus contains this and other important information about the Mutual Fund and ETF. You can obtain a prospectus and summary prospectus from your financial representative. Read carefully before investing.
Securities offered through LPL Financial, Member FINRA/SIPC. Dimensional Fund Advisors (DFA), Vanguard, JMOD Financial Services and LPL Financial are separate entities.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
No strategy assures success or protects against loss.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
Investing in mutual funds involves risk, including possible loss of principal.