amazing....Larry Swedroe's analysis leads him to the conclusion that the best way to index is to use funds from Dimensional Fund Advisors. And DFA funds are only available through financial adviors like (surprise) Larry Swedroe's firm. And those firms charge a minimum of 50 bp in addition to the DFA mgmt fees. Which makes the all in cost of using DFA much higher than the number used in the article and at least 3x the cost of using vanguard etfs. But that isn't mentioned in the article. Amazing .

I'm confused:

"A fund can add value by incorporating the momentum effect by temporarily delaying the purchase of stocks that are exhibiting negative momentum and by temporarily delaying the sale of stocks exhibiting positive momentum."

if there is a momentum effect (and it can be exploited) why not also "accelerate the purchase of funds exhibiting positive momentum" and "accelerate the selling of stocks exhibiting negative momentum"

And how DO you measure momentum in making these decisions ? Isn't this active management ? I thought you argue everything is in the price and timing is a fool's game. What is different between this and market timing . For example why is this different than the active management of a "momentum player" ?

as you can see I am (or maybe DFA is) quite confused You had convinced me that you can't make money assuming you can beat the market or that the mkt price didn't reflect all information. Now you are telling me I can "add value" (i.e. make extra money) by playing momentum.

for instance what is dfa's current assessment of the momentum factor in homebuiders ? what financials ? what was it 6 months ago ?is this recalculated daily like your index weightings ? monthly, quarterly ? how often do you act on this assessment, how often does it change ? is this done by individ stock, industry, fama french "risk factors"

very confusing Does DFA how a stock research or technical analysis division to do the research on momentum categorizations ?

If there is a momentum factor and those stocks with positive and negative momentum can be identified and profits can be made, why bother indexing at all. Just buy the stocks with positive momentum and short the stocks with negative momenutm. Since DFA apparently can identify such stocks why not start a fund that plays momentum through stock picking. I agree with the others I am dazed and confused. Maybe this article should be posted on the motley fool website.

Thanks Larry for the report. That funds are routinely loaning assets and benefiting by it that much I did not know. I also did not know that historically funds applied their fees as percentage of the fund’s stocks yield and not on the fund’s total assets as they do now. By applying it on total assets, they almost deplete all the annual income in the fund generated from the stocks’ dividends. So no dividend income is left for fund's shareholders. Jack Bogle reports on it here:

"The Importance Of Investment Income"


Link:

www.indexuniverse.com/component/content/article/3869.html?magazineID=2&issue=130&Itemid=11

Regardless if we agree with Larry's conclusion based on the various factors he presented in supporting his position, I do not agree with his fundamental premise that DFA funds are index funds. To compare DFA funds with broad market indexes as if they are the same is fundamentally a wrong position. DFA uses a rule based approach in managing its investments and they do not intend to replicate any broad market index. Not unlike RAFI and Powershares, DFA is trying to improve on the performance of a segment of an investable market or asset class. For example one such firm would suggest that their funds have out-performed on an absolute or risk adjusted basis a market index (S&P 500, Russell 2000 etc.) But they are not benchmark indexes that attempt to measure the financial markets. There is nothing wrong with building a better mouse trap but to suggest they are the same is quite another matter.

Furthermore, by any activities, actions, inactions, or interventions away from the benchmark index that the investment intends to replicate should be considered "active" acts. So I also question the notion that DFA is a passive investment under the traditional index tracking approach as so described by Larry.

few thoughts
First, I did not promote any fund over any other. I simply pointed out that passively managed funds are not commodities in the sense that the only thing that should matter is costs. As I showed in the example, two similar funds -one from DFA and a lower cost one from Vanguard--can look quite different after looking at just the investment income. So those looking only at OER are missing the bigger picture and thus likely making mistakes in their investment decisions. I know most professional advisors are not even aware of the data I showed so they make the same mistake.

Second, I fully agree that DFA does not run index funds. That is why the article is about passive funds not index funds

Third, there is no 50bp minimum that advisors charge. No idea where one would get that idea. And hopefully an advisor is adding value beyond just access to DFA --or you are hiring the wrong advisor.

Fourth, the momentum effect is very well known and documented in the literature--and it is documented as an anomaly. IT is not a risk premium. Now you cannot take advantage of it in the way proposed because AFTER costs you would lose. The way to take advantage of it is to delay trades that you would otherwise make anyway. Either by delaying selling stocks with positive momentum--even if get outside your buy/hold ranges until the positive momentum has ceased, or delay buying stocks that have fallen into your buy range until the negative momentum has ceased. Actually DFA has benefitted from positive momentum for a long time because of the buy and hold ranges they have used to reduce turnover and improve tax efficiency (that was luck though). Now they incorporate it specifically into their fund construction strategies.And there are very specific definitions about momentum.
BTW_in Carhart's famous study on mutual funds he used a four factor model--Fama and French's three plus momentum and ever since most (or at least many) now use a 4 factor model.

as i am sure you can see your statement about being able to profit from momentum by "delaying trades you would otherwise make" but not through any other strategy is logically inconsistent. If there is negative momentum why wouldn't i sell stocks in my portfolio that have negative momentum and screen for the (identifiable) stocks that have positive momentum. Whether or not i was going to buy(sell) them"anyway" is irrelevant. I can just tell myself i was going to "sell them anyway" based on some positive(negative) information that is in the market (i can call that "my decision criteria" in addition to momentum).

Simple logic If the factor is identifiable and can produce excess profits "what i was going to do anyway" is irrelevant. I don't get the costs argument either i can just limit the turnover in my portfolio.

If many use the four factor model why doesn't DFA use it, as you describe it and other academics use it DFA uses momentum in deciding WHEN to buy a stock but WHICH stocks to buy is determined by a 3 factor model which does not include momentum.

Also while people like Carhart use a momentum factor to explain they have not identified a systematic means for profiting from it. Carhart doesn't advocate "buying (selling) a fund you were going to sell anyway" as a profitable strategy.In fact he indicates quite the opposite

You also didn't indicate DFAs methodology for identifying relevant momentum and whether it has a special "momentum screening" research department. How do they distinguish between momentum and short term noise, do they use the tools of technical analysts (whose work is uniformly disdained in academia) some other more sophisticated technique ? are there academic papers explaining their criteria ?

also there is no way around the fact that the all in costs which include something for the advisor are more than indicated in the article. whether or not the advisor provides other valid services he does function a$ a gatekeeper that charges a toll

new passive fund from afd advisors: the fund holds a market capitalization weighted portfolio of the entire US stock market with one modification.Based on the manager's proprietary momentum screening model the portfolio holds a position equal to twice their market capitalization weighting for those stocks ranked in the top 10% for positive momentum and a short position in those stocks ranked in the 10% having the most negative momentum.

By taking advantage of the well known momentum factor the fund anticipates that it will outperform the simpl mkt capitalization weighted index.

Davidaa
There is no inconsistency-you simply miss the point

With positive momentum stocks DFA already has incurred the costs of buying the stock and will eventually incur the costs of selling. Now you on other hand would have to pay the costs of buying the stock and those costs combined with the cost of eventually selling would wipe out the "alpha"

Same on the downside for negative momentum.But costs of shorting stocks is much higher than buying, and once those costs are included again the "alpha" would go away. DFA just buys the stock at lower price than it would have bought it earlier (assuming negative momentum continues to exist ON AVERAGE)

BTW-it is negative momentum that explains most of the momentum effect.

larry, larry

you spin more than a Presidential candidate.

"BTW-it is negative momentum that explains most of the momentum effect."

maybe so, but not according to Carhart who you cited as an academic who found a momentum factor

and if it is negative momentum that explains most of the momentum effect why has dfa adjusted its sell criteria so it waits to sell stocks that have grown beyond dfa's buy range (from small cap to "mid cap"for example)? That is due to increase in value and appreciation in price and positive, not negative momentum.

In fact DFA has published materials based on POSITIVE momentum showing that most of the return in small cap indices comes from stocks that rise in value and that by waiting to sell them even if they become mid cap, one can increase returns

If it is negative momentum that explains most of the momentum effect why does DFA not incorporate a strategy of accelerating the sale of negative momentum stocks approaching their sell criteria (large cap stocks becoming small cap due to price depreciation) but DOES incorporate strategies based on positive momentum...again not logical.

And I am STILL waiting for an explanation of what the methodology of the DFA research team is in determining the "momentum weighting factor" for individual stocks". And why do you think there will be a high degree of accuracy in these determinations ? But I already know the answer....it's because it is done by DFA.