The Dimensional Fund Advisors International Core (DFA295) and International Vector (DFA227) equity funds offer exposure to the global equity markets, including emerging markets, excluding the US and Canada. As with all DFA equity funds, these products offer an increased exposure to small cap and value stocks relative to the market, with the Vector product having the most pronounced small cap and value tilts. These funds also have higher fees than comparable market-cap weighted index funds: DFA295 has an MER of 0.49% and DFA227 has an MER of 0.61% compared to a weighted average MER of 0.27% for an 87%/13% mix of XEF and XEC. Fees tend to be one of the best predictors of future performance, but with Dimensional’s tilts toward small and value stocks, and their careful implementation, we might expect slightly better long-term performance.
DFA vs. Index ETFs
Index returns cannot be captured by investors, so we will compare the DFA returns to live ETFs with their own fees and implementation costs. There is insufficient data for XEF and XEF, which are Canadian listed, for a since inception comparison. We have instead constructed a hypothetical ETF portfolio consisting of 87% EFA and 13% EEM until October 2012, 87% IEFA and 13% IEMG from November 2012 through April 2013, finally switching to 87% XEF and 13% XEC through June 2018. In a live portfolio an investor would be unlikely to switch ETFs with this frequency due to tax implications and transaction costs. This has been ignored for the comparison. It is also worth noting that IEFA, IEMG, XEF, and XEC offer some small cap exposure, while EFA, EEM only offer large and mid cap exposure.
For the ETF comparison we use EFA + EEM / IEFA + IEMG / XEF + XEC
| DFA295 | Index ETFs | Difference | |
|---|---|---|---|
| 1-Year Total Return (%) | 9.24 | 8.95 | +0.29 |
| 3-Year Annualized Return (%) | 7.83 | 7.37 | +0.46 |
| 5-Year Annualized Return (%) | 11.89 | 11.40 | +0.49 |
| 10-Year Annualized Return (%) | 6.00 | 5.60 | +0.40 |
| Since Inception (07/2005) (%) | 5.97 | 6.03 | -0.06 |
Data Sources: iShares, MSCI, Morningstar Direct, Dimensional Returns Web
| DFA227 | Index ETFs | Difference | |
|---|---|---|---|
| 1-Year Total Return (%) | 9.37 | 8.95 | +0.42 |
| 3-Year Annualized Return (%) | 7.95 | 7.37 | +0.58 |
| 5-Year Annualized Return (%) | 11.94 | 11.40 | +0.54 |
| 10-Year Annualized Return (%) | 5.63 | 5.60 | +0.03 |
| Since Inception (07/2005) (%) | 6.68 | 6.83 | -0.15 |
Data Sources: iShares, MSCI, Morningstar Direct, Dimensional Returns Web
DFA295 and DFA227 have managed to outperform index tracking ETFs after fees for the trailing 10-year period. This is no small feat. Some credit must go to DFA for implementation of these strategies, but most of the credit goes to the fact that International small and value stocks have delivered excess performance. Both funds have trailed since inception. This is again driven by the weaker performance of International small and value stocks at the beginning of the funds’ lives.
Tax Considerations
Holding EEM, EFA, IEFA, and IEMG would result in one level of unrecoverable withholding tax from the foreign countries for a Canadian taxable investor. DFA holds securities directly, meaning that the taxes withheld by foreign countries could be could be recovered. Today this is somewhat less of an issue for an ETF investor as XEF holds securities directly. However, XEC continues to hold the US listed IEMG resulting in one level of unrecoverable withholding tax. On after-tax basis we would expect this to further improve the performance of DFA over a comparable International equity ETF allocation.
Original post at pwlcapital.com