MFOHome About Commentary Discussions Funds The Best Resources Support Us!

Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

Sign In Register

Categories

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

"Cloning DFA" (Journal of Indexes Jan 2015) + Portfolio Visualizer Tool

ibartman
edited September 2016 in Fund Discussions
In Jan 2015 Richard Wiggins wrote a fascinating article at the Journal of Indexes called "Cloning DFA".

This "must read" article is available here: http://tinyurl.com/cloning-dfa

As noted by Mr Wiggins in his article:
However, low-cost funds, especially ETFs, now occupy every asset category offered by DFA. As new indexes have come to market, investors can get the unloved and unwanted part of the market for a lot less. Today DFA offerings are very close to what other major market benchmark providers deliver; the DFA U.S. Small Cap Value [DFSVX], for example, is not dissimilar from the iShares SmallCap 600 Value Index Fund (IJS|A-87). Where there’s not a perfect substitute, it’s rather easy to combine two less expensive funds and create an effective clone.
The article then proceeds to show how DFSVX can be cloned with a combination of two ETFs: VBR and IWC, the Vanguard Small Cap Value and the iShares Micro Cap, respectively. While DFA funds may only be available through financial advisors that have been approved by DFA, and can charge additional fees, the ETFs are open to anyone with a brokerage account.

Below are the current (Sep 2016) expense ratios of DFSVX, and the two ETFs used in the article. At the time that the article was published (Jan 2015) the ER of DFSVX was 52 bps, and the blended ER of the Vanguard and iShares ETFs was 17 bps. 
DFSVX: 52 bps
VBR:    8 bps
IWC:   60 bps
A footnote to the conclusion of the article noted that:
The authors [of the JoI article] are working with Silicon Cloud Technologies, LLC which will offer software at PortfolioVisualizer.com that computes these factors automatically.
As originally noted by MJG in Feb 2014, that site - [https://www.portfoliovisualizer.com] - is available to all. Today, it contains (among other things) the following tools:

Fama French Factor Regression Analysis (For individual funds or ETFs)

Match Factor Analysis

Once you have identified a set of potential similar funds or ETFs - based on fundamental or factor analysis - to a target fund, you can use the latter tool to derive a two-investment "clone", based on either the results of factor regressions or historical performance. The site then provides various metrics that can be used to assess the quality (i.e. accuracy) and performance of the clone versus the target fund or investment.

Here, for example, is a clone as inspired by the article: http://tinyurl.com/dfsvx-vbr-iwc

Thought that others might find the website and Jan 2015 JofI article interesting.

Comments

  • msf
    Perhaps a distinction without a difference, but "clone" is being used here (and in the article) in a somewhat unconventional way.

    Typically, a clone fund is a fund with substantially the same portfolio as the original. For example, a "clone" of a fund may use the same managers as the original and be offered as an investment option for variable annuities. Often they'll be called "Portfolios" rather than "Funds."

    Here, what is being cloned is the performance only, not the portfolio. ETF.com is pretty clear on this: "We have to address what it means to successfully clone something. A successful “clone” will “act the same,” i.e., have a pattern of returns that mimics the DFA portfolio as closely as possible. " That's reiterated in the "Match Factor Analysis" description above.

    Used this way, closet index funds may be regarded as high priced clones of index funds (though likely cloning fewer factors). Nothing wrong with this usage of clone - you're getting a functional clone, which in the end is all that should matter.

    This cloning suggests that DFA's value tilt in microcaps is inconsequential, since the microcap portion is being replaced by a microcap blend index.
  • markot06
    Another way to substitute DFSVX, published a year earlier than this article -- see goo.gl/7RzdsC
    For the 5 years through Aug 2016, DFSVX could also have been substituted by a fixed portfolio of ETFs (~41% IWN, 14% RZV, 10% PSCT, 9% XRT, 8% PRN, 8% KBE, 6% PXI, and a couple smaller positions) with a similar cumulative return and lower standard deviation.
Sign In or Register to comment.