Building A Dimensional Fund Style Portfolio With ETFs

In one of my previous article about factor-based portfolios offered by Roboadvisors, I compared two opposite strategies of factor-based investing – growth, large-cap and low volatility against value, small-cap and profitability.

Dimensional Funds Advisor (DFA), or Dimensional Funds, which I had mentioned in that article, seek to capture higher returns by applying evidence-based research into investment solutions. They achieve that by constructing a broad market portfolio tilted towards small-cap, value and profitability factors.

For more information, you may refer to these two articles which talk more about Dimensional funds.

You can also try Googling “DFA vs Vanguard” to find many more articles about it.

The only issue is that regular retail investors do not have access to Dimensional Funds. You may only access these funds via a DFA-trained financial advisor which means you will have to pay an advisor’s fee in addition to the fund expense ratios – most cost.

You may also access these funds via MoneyOwl or Endowus, which typically charge an access/advisor fee of 0.6% – 0.65%.

However, if you do not wish to engage a DFA trained financial advisor or use a roboadvisor, what other alternatives do you have? 

In this article, I will share how you can build a Dimensional Fund equivalent portfolio by using ETFs. 

Disclosure: I do not own any of the ETFs I share below. However, I currently have some investments in MoneyOwl and Endowus. All reviews are my own opinion and should not be considered as financial advice.

Avantis ETF

Avantis Investors is a newly set up subsidiary of American Century Investments. They are a direct competitor of Dimensional Fund Advisors (even most of their execs were from Dimensional previously)

They use the same approach as Dimensional by applying financial science in their investment strategies.

Avantis launched five low cost multifactor ETFs which are similar to DFA fund offerings in Sep 2019 last year.

  • Avantis Emerging Markets Equity ETF (AVEM)
  • Avantis International Equity ETF (AVDE)
  • Avantis International Small Cap Value ETF (AVDV)
  • Avantis US Equity ETF (AVUS)
  • Avantis US Small Cap Value ETF (AVUV)

Note that all these funds are actively managed and do not track an underlying index. However, the costs for these funds are kept low: 0.15%-0.33%

Avantis US Equity ETF

Let us just look at the Avantis US Equity ETF (AVUS). It offers a broad US market portfolio (large, mid and small cap) tilted towards value and profitability.

The ETF characteristics compared to the Russell 3000 (index). Source from Avantis US Equity ETF factsheet

As a result, you will have a portfolio that is weighted more on the value sectors – financials, industrials, consumer discretionary and under weighted on growth sectors such as tech.

The ETF sector weights compared to the Russell 3000 (index). Source from Avantis US Equity ETF factsheet

Note that this fund is actively managed. However, the TER is merely 0.15% which is pretty low,

Estimating the Cost

The main difference between an ETF and a mutual fund (unit trust) is that ETF is traded on the market like a stock. Because it is traded like a stock, it introduces two additional costs to the individual: trading commissions and the bid-ask spread.

To make it simple, let’s assume that you are trading using FSMOne (Fundsupermart) with a 0.08% commission rate for trading US stocks.

The 30 day median bid-ask spread from the Avantis website is 0.10%

For a long term investor doing lump sum investments, these costs will be negligible. However, if you plan to dollar cost average or contribute regularly, these small costs may add up in the long run.

The other cost associated is the foreign withholding tax on dividends.

Looking at the historical data from yahoo finance, since its inception, AVUS had paid $0.527 of dividends. The current trading price is $52.68 and hence the net yield (dividend paid after subtracting TER) is estimated at 1% up to date. The extra costs due to dividend withholding tax is 0.30%

TER0.15%
Commission0.08%
Bid-Ask Spread0.10%
Tax Withholding Ratio (TWR)0.30%
Total Cost0.63%

Note, I have exclude some other costs such as the foreign exchange spread, custodial fees etc.

All the other funds offered by Avantis

Here are some basic details of the ETFs offered by Avantis. Note that they also offer a mutual fund equivalent to each ETF.

ETFTickerSummaryTER
Avantis Emerging Markets Equity ETFAVEMEmerging markets value and profitability0.33%
Avantis International Equity ETFAVDEDeveloped markets (ex US) value and profitability0.23%
Avantis International Small Cap Value ETFAVDVDeveloped markets (ex US) small, value and profitability0.36%
Avantis US Equity ETFAVUSUS value and profitability0.15%
Avantis US Small Cap Value ETFAVUVUS small, value and profitability0.25%

Building An Equivalent DFA Portfolio Offered By MoneyOwl

Holding a combination of AVDE, AVEM and AVUS will give you an equivalent of MoneyOwl’s DFA offering of Dimensional Global Core Equity Acc SGD and Dimensional Emerging Markets Large Cap Core Equity Acc SGD. The main difference is that this is in USD and domiciled in US while the Dimensional Funds are domiciled in Ireland and offered in SGD.

Comparing the costs across these three ETFs:

AVUSAVDEAVEM
TER0.15%0.23%0.33%
Commission0.08%0.08%0.08%
Bid-ask spreads0.10%0.23%0.24%
Tax Withholding Ratio (TWR)0.30%0.34%0.31%
Total Costs0.63%0.88%0.96%

MoneyOwl DFA portfolio is charging around 1.20%.

Since the US is 63% of the MSCI World index, I will hold 60% AVUS and 40% AVDE for the developed market portion of my portfolio. I will also hold 80% developed market and 20% emerging market.

ETFCostsWeightProportional Cost
AVUS0.63%48%0.3024%
AVDE0.88%32%0.2816%
AVEM0.96%20%0.192%
Total Cost0.776%
Contructing a large cap, value and profitability portfolio with ETF (equivalent to MoneyOwl)

So you can get an equivalent MoneyOwl portfolio for a cost of 0.776%.

Note, this calculation is just a rough estimate and it is not accurate.

Building a Global Portfolio With Small Cap

MoneyOwl’s portfolio only offers large cap core portfolios by DFA.

If you want to go one step further and add small cap in your mix, you may add the small cap US and small cap international Avantis ETF to your portfolio.

Estimating the cost of AVUV and AVDV

Note that for AVDE, AVDV and AVEM, there will be two layers of withholding taxes (one at the portfolio level and one at the fund level). Because the withholding taxes at the portfolio level is hidden from me, I just use the historical dividend payout for the fund (which will be net of withholding taxes at the portfolio level and fund expense ratios) to calculate the tax withholding rate.

AVUVAVDV
TER0.25%0.36%
Commission0.08%0.08%
Bid-ask spread0.12%0.28%
Tax Withholding Ratio (TWR)0.32%0.32%
Total Costs0.77%1.04%

Estimating the cost of the portfolio:

ETfCostsWeightProportional Cost
AVUS0.63%42%0.2646%
AVUV0.77%6%0.0462%
AVDE0.88%28%0.2464%
AVDV1.04%4%0.0416%
AVEM0.96%20%0.192%
Total Cost100%0.7908%

John Hancock Multifactor ETFs

If, for any particular reason, you wish to use only Dimensional, there is still an alternative to create a DFA style portfolio using John Hancock multifactor ETFs.

Their ETFs tracks the indices provided by Dimensional – built with the same methodology and research from Dimensional.

They even offer sector based ETFs but mostly focused on the US. You can still construct the equivalent of a MoneyOwl portfolio using the following ETFs:


Multifactor Developed International ETF
JHMDDeveloped markets (ex US) small, value & profitability0.39%
Multifactor Emerging Markets ETFJHEMEmerging markets small, value & profitability0.49%

Multifactor Large Cap ETF
JHMLUS large cap, value & profitability0.29%

Multifactor Mid Cap ETF
JHMMUS mid cap, value & profitability0.42%
Multifactor Small Cap ETFJHSCUS small cap, value & profitability0.42%

The expense ratios are at the higher side (~slightly higher than DFA funds TER) because they are using indices directly from Dimensional.

The advantage is that you can create more customized portfolios if you wish to target certain sectors.

Estimating the Total Cost for Each ETF

JHMLJHMMJHSCJHMDJHEM
TER0.29%0.42%0.42%0.39%0.49%
Commission0.08%0.08%0.08%0.08%0.08%
Bid-ask spreads0.05%0.09%0.13%0.27%0.17%
Tax Withholding Ratio (TWR)0.57%0.37%0.40%0.65%0.79%
Total Costs0.91%0.96%1.03%1.39%1.53%

Building An Equivalent DFA Portfolio Offered By MoneyOwl

ETFTotal CostWeightProportional Cost
JHML0.91%16%0.1456%
JHMM0.96%16%0.1536%
JHSC1.03%16%0.1648%
JHMD1.39%32%0.4448%
JHEM1.53%20%0.306%
Total Costs1.21%
Contructing a large cap, value and profitability portfolio with ETF (equivalent to MoneyOwl)

The total cost here using the John Hancock multifactor ETFs are similar to what you pay with MoneyOwl. Note that for MoneyOwl, I did not calculate the TWR so the total cost for moneyowl is roughly ~1.36% (source InvestmentMoats)

A Quick Comparison of Their Performance

Comparison between JHMD and AVDE
Comparison between JHEM and AVEM

Conclusion

There are ETF alternatives available if you would like to construct a portfolio similar to Dimensional funds.

You can choose from Avantis ETF and John Hancock Multifactor ETFs. Dimensional had also recently registered with the SEC to launch three actively managed ETFs later this year. So, there will be more ETF options in the future.

The only disadvantage is that the ETFs are all domiciled in the US. Besides the foreign withholding tax, you will also need to take note of the 40% estate tax if your portfolio exceeds a certain value.

So, investing in Dimensional funds via MoneyOwl and Endowus are still good options because they are domiciled in Ireland which does not have any estate tax. They also offer them in SGD, so you will not have to deal with currency exchange spreads yourself (the fund manager will do it for you, and usually at a better rate).

But if you want to go DIY, feel free as well.

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Author: Fatty's Finance

Finance is like health. It becomes an issue if it is not well maintained. I want to help you get back in shape!

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