Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA, CFP

Associate Portfolio Manager
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After tax returns of DFA Five-Year Global Fixed Income

March 23, 2015 - 6 comments

The notion that premium bonds are highly tax inefficient has been written about extensively by Justin Bender and Dan Bortolotti. In a recent blog post, Justin used his after tax rate of return calculator to demonstrate the tax efficiency of the First Asset strip bond ETF (BXF). BXF was in a league of its own in 2014 with a tax cost ratio 33bps lower than its closest peer – the tax cost ratio can be thought of as an additional MER that the investor pays in taxes. Justin compared ten short term bond ETFs, and BXF had the highest before and after tax returns of the set. The DFA Five-Year Global Fixed Income Fund (DFA231) was not included in Justin’s ETF comparison.

Unlike the ETFs examined by Justin, DFA231 is not an index fund. It is a short term fixed income fund that shifts its holdings based on changes in the yield curve, while keeping the maturities between one and five years. If the yield curve in a country is upward sloping, the fund will hold longer maturity bonds in that country as the risk of holding longer maturities is being rewarded. If the yield curve is flat, the fund will look similar to the index as there is no significant benefit to holding longer maturities. If the yield curve is inverted, the fund will hold very short maturities. The fund has the flexibility to find opportunity in yield curves around the world, and it is hedged back to the home currency (CAD) allowing global bonds to be pursued without adding volatility due to currency fluctuations. The fund, as at September 30, 2014, had just over 10% of its holdings in Canada, while more than 26% were in the United States, and Australia was also notable at 8%. DFA puts forth an effort to keep the coupons low, reducing the tax issues presented by premium bonds.

Does it work?

This fixed income strategy has been successful. In 2014, both the before and after tax returns beat out the toughest competition by a healthy margin. To be fair to the competition, DFA231 tended to have a longer average maturity and duration than both BXF and the iShares Canadian Short Term Bond Index ETF (XSB) through the year. The fund’s higher returns can be attributed to increased risk, the risk was just well compensated over this time period. It is also true that DFA231 carries a higher MER at .38% than BXF at .20% and XSB at .25%, which contributes to its lower tax cost ratio; more of its taxable distributions are absorbed by fees before they reach investors.

PWL Capital - Blog: After tax returns of DFA Five-Year Global Fixed Income

2014 was not the first good year

DFA231 has had a long history of outperformance and tax efficiency compared to XSB, a short term bond index fund with a ten year history available for comparison.

PWL Capital - Blog: After tax returns of DFA Five-Year Global Fixed Income table 2

There is no way to determine if the strategy will continue to be this successful in the future, but it currently appears to be a tax efficient option for short term fixed income allocations.

By: Ben Felix with 6 comments.
  09/04/2018 4:00:07 PM
Benjamin Felix
Hi Brad, it’s not actually up to DFA. They are not able to control where you transfer your assets. They are only able to control who purchases their funds. Any advisor that can hold mutual funds can hold DFA funds – they may not be able to purchase them – but they can hold them. I have personally seen DFA assets held with a non-DFA advisor after an in-kind transfer. I would look into it further.
  27/03/2018 2:45:16 PM
Hello Ben, I tried to move my DFA funds in-kind from a DFA approved advisor to a non-DFA advisor, and DFA flatly refused to make the transfer. They stated directly that DFA funds can only be held with an advisor that is specifically approved by DFA themselves. They only approve DFA advisors that are brainwashed into only recommending DFA funds and to never sell DFA funds out of a clients portfolio. Thus, anyone holding DFA funds is not able to use an advisor of their CHOICE. DFA clients are effectively TRAPPED and hand-cuffed to a DFA approved advisor. In order to get control your money you can only transfer to another brainwashed DFA advisor OR sell all DFA holdings and trigger any capital gains, creating a tax burden. So why would anyone knowingly invest in DFA when any other mutual fund does not limit a clients' choice of advisor and allows a client to make "in-kind" transfers to suit their portfolio needs. My savings are split between two institutions. Due to DFA's shady business practices, I can not take advantage of fee reductions, inherent in consolidation, unless of I cash all DFA funds, or move both accounts over to a DFA approved advisor, thus compounding my DFA problem. This behaviour by DFA is unethical, and it is very disturbing to realize that DFA is trying to prevent clients from having control of their own money.
  22/03/2018 10:38:50 AM
Benjamin Felix
Hi Brad, sorry to hear about your experience. You could easily transfer your investments ‘in-kind’ to a self-directed brokerage or to a new advisor and transition to ETFs over time. A non-DFA advisor is not able to buy new units of DFA funds, but they can hold the funds that you already own. I hope that helps.
  16/03/2018 10:13:12 AM
Brad Grills
No amount of higher returns is worth having your money TRAPPED at DFA! DFA clients can not use an advisor of the clients choosing. DFA advisor are brainwashed into only selling DFA. ETFs allow a client to control their money while DFA imprisons your money to DFA! I am existing DFA client and am tired of being continually recommended DFA. I can not get my money out without collapsing all my investments. DFA is not worth owning at the cost of my CHOICE of advisor!
  07/05/2015 4:11:49 PM
Ben Felix
Grant, DFA231 will not tend to have the same duration as the index. It will sometimes be shorter, sometimes longer, depending on the yield curve. The pre-tax return was very similar between the two funds in my 10 year chart. It's the after-tax return that is of interest.
  07/05/2015 9:41:24 AM
Ben, with regard to the 10 year figures, was the duration of DFA231 and XSB comparable? As interest rate were falling during the period, differences in duration could explain the difference in performance.

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