If you read enough about investing in index funds, sooner or later you will come across DFA funds. Authors who are also investment advisors mention DFA funds in their books and articles. DFA funds are said to be better in that they capture the small cap and value factors better. Their small cap funds invest in smaller companies. Their value funds score higher on the value scale.
The catch is that you can’t buy DFA funds without a DFA-approved financial advisor. Those who don’t want to pay an advisor to join the club wonder whether they are missing out on something when they are shut out.
There is a backdoor. A small one. You don’t need a $1 million. Nor do you have to pay $1,000 a year or more to an advisor. Some employers have DFA funds in their 401k-type plans. If you happen to work for one, you can buy DFA funds there. I’m not talking about those. This backdoor is easier to get in. Many people are already in.
For the purpose of this article I’m not getting into the debate about whether you should want DFA funds to begin with. DFA vs Vanguard is a bit like iPhone vs Android. People who have DFA say they are great. People who don’t have it say they can get by without. I’m only showing you how to get into DFA funds inexpensively if you want them.
West Virginia Smart529 Select Plan
West Virginia Smart529 Select Plan offer investment options exclusively in DFA funds. It’s a 529 plan. You don’t have to be a West Virginia resident to use it.
It has age-based options and 10 static portfolios at different risk levels.
- Aggressive Growth
- Moderately Aggressive Growth
- Moderate Growth
- Moderately Conservative
- Fixed Income
- 1-Year Fixed
You don’t get to pick individual funds. One of the ready-made portfolios should be good enough though.
The program manager charges 0.42% on top of DFA’s fund expense ratios. West Virginia charges another 0.05%. Considering that other 529 plans also have some extra cost — for example Vanguard 500 Index Fund costs 0.21% in Vanguard’s Nevada 529 Plan versus 0.05% outside — you are really just paying extra 0.3% if you move your current 529 plan to the West Virginia plan for DFA funds.
If you are investing $100k, the extra “toll” costs $300 a year. That’s much lower than what an advisor with access to DFA funds would charge at that asset level.
Utah 529 Plan
Utah’s 529 plan UESP is highly rated for its low cost and good investment options. You don’t have to be a Utah resident to use it. These DFA funds are available in the Utah 529 plan:
- DFA Global Equity Portfolio (DGEIX)
- DFA Global Allocation 60/40 Portfolio (DGSIX)
- DFA Global Allocation 25/75 Portfolio (DGTSX)
- DFA U.S. Large Cap Value Portfolio (DFLVX)
- DFA U.S. Small Cap Value Portfolio (DFSVX)*
- DFA Real Estate Securities Portfolio (DFREX)*
- DFA International Value Portfolio (DFIVX)*
- DFA One-Year Fixed Income Portfolio (DFIHX)
These funds are institutional class funds with lower expense ratios. For instance the net expense ratio of DFA Global Equity Portfolio (DGEIX) is 0.31%. The ones marked with an asterisk are each limited to maximum 25% of the account.
With a bit of elementary math, you can mix the first three global portfolios into any stock:bonds ratio in between. For example if you want 70% stocks 30% bonds you can do
- 25% in DFA Global Equity Portfolio (DGEIX) plus
- 75% in DFA Global Allocation 60/40 Portfolio (DGSIX)
If you want 50% stocks 50% bonds you can do
- 33% in DFA Global Equity Portfolio (DGEIX) plus
- 67% in DFA Global Allocation 25/75 Portfolio (DGTSX)
If you want to load up on value (not saying whether you should), you can do
- 50% in DFA U.S. Large Cap Value Portfolio (DFLVX) plus
- 25% in DFA U.S. Small Cap Value Portfolio (DFSVX) plus
- 25% in DFA International Value Portfolio (DFIVX)
The good part about the Utah’s 529 plan is that it doesn’t charge an extra toll for investing in DFA funds. You pay 0.2% administrative fee on top of DFA’s fund expense ratios, but you would pay the same extra 0.2% anyway if you invest in other funds in the plan. There’s no added cost for investing in DFA funds. Many already consider Utah’s 529 plan as the best 529 plan before it added DFA funds.
Money Is Fungible
If you don’t have or need a 529 plan, it’s probably not worth creating one just for investing in DFA funds. If you already have one, and if you want DFA funds, it may be worth shuffling between your 529 plan and your other accounts: move your 529 plan to Utah for DFA funds and put other investments in your other accounts.
Note it won’t work if your state recaptures past deductions if you move your 529 plan out of state. Some 22 states don’t offer a deduction to begin with or they don’t care which plan you use. Another 12 states offer a deduction but they don’t take it back if you move the money out. Only a minority of states offer an incentive for 529 plans and they require you to both contribute to and stay in the in-state plan in order to get the incentive.
[Photo credit: Flickr user Roy Niswanger]