If you’ve read my article that talks about our portfolio construction you’ve probably realized that we use a fund manager called Dimensional Fund Advisors (DFA). Because DFA believe that financial advisors are the ones best informed to make decisions around asset allocation they only sell their funds through a licensed financial advisor. That’s fine if you’re with an advisor that is licensed to sell DFA funds but if you’re a DIY retail investor then it does leave you in somewhat of a pickle if you want to access the risk profile that DFA provides. One solution to this issue is to go with the fund manager that DFA is most often compared with, Vanguard.
For retail investors, you can either go with Vanguard’s managed fund options or their EFT’s, I’ve created a table that summarizes the costs of these investment options below. However, before we get to the table if you’re new to investing I’ll need to explain a few of the terms listed below:
ETF: Exchange traded fund, a type of security that represents a collection of securities, such as stocks, that can be traded on a stock exchange such as the ASX. ETF’s are often used to replicate the movements of an index/benchmark (Chen 2020).
Benchmark: A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose (Chen 2020).
MER: The management expense ratio is how much of the fund’s assets are used as costs of running the fund (Hayes 2019). For example, if you have $10,000 of assets under management (AUM) and the fund you’re invested in has MER of 0.8%, then the cost that you will need to pay to the fund manager is $80 per year.
Entry and exit costs: A fund manager, or broker, will often charge a fee to enter and exit the fund. For managed funds this is normally a percentage of AUM, however with, products traded on an exchange, such as ETF, it is normally covered by the bid-ask spread. The bid represents the current highest price that a potential buyer is willing to pay for the security and the ask represents the current lowest prices that potential seller is willing to sell the security for. In markets the bid is always lower than the ask price, this is because as soon as the bid equals the ask price then a sale will be made and the bid and ask price will then move again.
| Fund | Benchmark | MER | Entry Cost | Exit Cost |
| Dimensional Australian Core Equity Trust | ASX300 | 0.281% | 0.08% | -0.08% |
| Vanguard Index Australian Shares Fund | ASX300 | 0.75%, 0.5%, 0.35%* | 0.05% | -0.05% |
| Vanguard Australian Shares Index ETF (VAS) | ASX300 | 0.1% | Offer | Bid |
| Dimensional Global Core Equity Trust Unhedged Class | MSCI World ex Aus | 0.36% | 0.1% | -0.1% |
| Vanguard Index International Shares Fund | MSCI World ex Aus | 0.9%, 0.6%, 0.35%* | 0.06% | -0.06% |
| Vanguard MSCI Index International Shares ETF (VGS) | MSCI World ex Aus | 0.18% | Offer | Bid |
| Dimensional Global Core Equity Trust Hedged Class | MSCI World ex Aus (hedged to AUD) | 0.36% | 0.12% | -0.12% |
| Vanguard Index Hedged International Shares Fund | MSCI World ex Aus (hedged to AUD) | 0.9%, 0.6%, 0.35%* | 0.11% | -0.11% |
| Vanguard MSCI Index International Shares (Hedged) ETF (VGAD) | MSCI World ex Aus (hedged to AUD) | 0.1% | Offer | Bid |
*Fees for first $50,000, balance between $50,000 to $100,000, balance over $100,000
To construct the table above I’ve chosen retail options from Vanguard based on the benchmark that DFA uses as a reference point to their funds. Vanguard seeks to create funds that replicate the returns of these indices. You will notice that the MER’s of Dimensional funds are mostly lower than their Vanguard counter parts, the reason for this is that Dimensional operates in a wholesale space and is sold via financial advisors that will charge an additional fee for their service of taking care of your asset allocation.
Advantages of ETF’s over managed funds
Generally speaking, ETF’s have higher entry costs (due to transaction fees) but lower MER’s, so the overall cost of ownership decreases as more time passes. When purchasing an ETF you will typically do so through your brokerage account and the cost to buy the security will be your brokerage fee. If you are with Westpac brokerage, for example, it will cost $29.95 to purchase securities on the ASX up to the value of $10,000. However, there are online brokers that may have lower fees so shop around to see what you can find.
EFT unit prices are valued almost instantaneously which means that you can track your portfolio value with a very high degree of accuracy. It is also very easy to move into and out of an ETF, all you need to do is issue a buy or sell order to your broker, whereas the process of liquidating managed fund units will usually involve some additional time and paperwork. This has an added benefit of making portfolio rebalancing very easy.
Advantages of managed funds over ETF’s
Vanguard allows you to use BPay to purchase fund units which means that there is no brokerage fee to enter. If you are investing smaller amounts then it is very cost effective. Take the example of buying $1000 worth of the Vanguard Index Australian Shares Fund; the entry cost would be 0.05% x $100 = $0.50 vs buying the same amount of the Vanguard Australian Shares Index ETF (VAS) with a brokerage of $29.95. In this example the difference in entry cost is hugely in favour of the managed fund.
As discussed earlier the prices of managed funds are not updated as frequently as an ETF which can be a blessing in disguise. Since the pricing information of ETF’s is highly visible it can lead to people constantly checking the value of the portfolio. This, in turn, can make people more inclined to try to time the market, or, even worse, create a desire to move in/and out of the fund. Both behaviours can be destructive towards long term wealth accumulation. The same is also true of it being more difficult to liquidate managed fund holdings, it creates a mental barrier towards destructive behaviours like panic selling during a market crash.
ETF or managed fund?
This decision will depend on whether or not you will be able to execute, and stick to, your investment strategy. If you are the person whose behavior is influenced by market moves and feel like you’d be tempted to try to time your purchases or transact frequently then going with the managed fund option will likely suit you better. In addition to this, if your strategy dictates that you purchase smaller quantities more frequently then you’ll save on the initial transaction costs by going with a managed fund. On the contrary, if you’re able to purchase ETF units and hold them for the long term without transacting, then the lower MER’s of the ETF’s will save you money.
Why do we invest with Dimensional?
After reading all of this, you’re probably wondering, why, if Vanguard ETF’s are available on the retail market at a lower cost, do we still go with Dimensional Fund Advisors? While I will reserve a detailed discussion of this topic for another set of articles, in a nutshell: even though the benchmarks are the same for the DFA funds and the Vanguard funds that I’ve listed above, DFA constructs their funds not with the objective of replicating the index but to provide its clients with a different risk profile to the standard benchmark. This risk is based on factors (sometimes referred to as dimensions) that have been shown in the past to create excess returns when compared with the benchmark index. Typically, some of these risks include, company size (as measured by market capitalization) and value (as measured by the price-to-book ratio). So, we own their funds in order to increase exposure to these risks in exchange for the chance of higher returns over a long period of time.
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References
Dimensional, 2020, Australian Core Equity Trust, viewed 28/3/2019, <https://au.dimensional.com/funds/australian-core-equity-trust>
Dimensional, 2020, Global Core Equity Trust Unhedged Class, viewed 28/3/2019, < https://au.dimensional.com/funds/global-core-equity-trust-unhedged-class>
Dimensional, 2020, Global Core Equity Trust Hedged Class, viewed 28/3/2019, <https://au.dimensional.com/funds/global-core-equity-trust-aud-hedged-class>
Vanguard Investments, 2020, Vanguard Index Australian Shares Fund, viewed 28/3/2020, <https://www.vanguardinvestments.com.au/retail/ret/investments/product.html#/fundDetail/retail/portId=8129/assetCode=equity/?overview>
Vanguard Investments, 2020, Vanguard Index International Shares Fund, viewed 28/3/2020,<https://www.vanguardinvestments.com.au/retail/ret/investments/product.html#/fundDetail/retail/portId=8145/assetCode=equity/?overview>
Vanguard Investments, 2020, Vanguard Index Hedged International Shares Fund, viewed 28/3/2020,
<https://www.vanguardinvestments.com.au/retail/ret/investments/product.html#/fundDetail/retail/portId=8146/assetCode=equity/?overview>
Vanguard Investments, 2020, Vanguard Australian Shares Index ETF (VAS), viewed 28/3/2020, <https://www.vanguardinvestments.com.au/retail/ret/investments/product.html#/fundDetail/etf/portId=8205/assetCode=equity/?overview>
Vanguard Investments, 2020, Vanguard MSCI International Shares ETF (VGS), viewed 28/3/2020, <https://www.vanguardinvestments.com.au/retail/ret/investments/product.html#/fundDetail/etf/portId=8212/assetCode=equity/?overview>
Vanguard Investments, 2020, Vanguard MSCI International Shares (Hedged) ETF (VGAD), viewed 28/3/2020, <https://www.vanguardinvestments.com.au/retail/ret/investments/product.html#/fundDetail/etf/portId=8213/assetCode=equity/?overview>
Chen, J, What is an ETF, lnvestopedia, last viewed 25/2/2020 <https://www.investopedia.com/terms/e/etf.asp>
Chen, J, Benchmark, lnvestopedia, last viewed 25/2/2020 <https://www.investopedia.com/terms/b/benchmark.asp>
Hayes, A, What Is an Expense Ratio (ER)?, Investopedia, last viewed 25/2/2020 <https://www.investopedia.com/terms/e/expenseratio.asp>