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Has the DFA International Core Equity Fund Outperformed its Benchmark?

November 23, 2012 - 0 comments

Good question.  Benchmarking DFA fund returns is an extremely difficult task for the average investor – mainly because DFA does not follow a specific index.  Their funds are generally tilted towards smaller and undervalued companies (causing their funds to outperform when these companies are in favour and underperform when these companies lose their lustre).  Instead of trying to run a complicated 3-factor regression on the fund returns, let’s simply compare them against some suitable indices, and then against some exchange-traded funds (ETFs) that mirror these indices (in order to simulate the costs of ETF ownership).

Benchmark Indices:

  • July 2005 to December 2006:  MSCI EAFE Index (net dividends) in Canadian dollars
  • January 2007 to October 2012:  MSCI EAFE plus Emerging Markets Index (net dividends) in Canadian dollars

The DFA International Core Equity Fund Class F (DFA295) changed its mandate in 2007 to include emerging markets companies.  To account for this change, a developed country index is used until the end of 2006.  The index is then replaced in 2007 with one that includes emerging markets companies.  All index returns are quoted after foreign withholding taxes; this allows for a more apples-to-apples comparison, as DFA’s returns are quoted after foreign withholding taxes.


Since inception, the DFA fund has lagged the benchmark indices by 0.40% annualized.  Keep in mind that the index does not include any fees, expenses, or trading costs.  The DFA fund has estimated total costs of about 0.62%.  In other words, they were able to capture the returns of the market while also making up a portion of their fees (not an easy task).

Benchmark ETFs:

Since no one can invest directly in an index, I’ve chosen ETFs that closely follow the indices from our first example.  The iShares MSCI EAFE Index Fund (EFA) is held until the end of 2006, at which point 17% of the fund is switched into the iShares MSCI Emerging Markets Index Fund (EEM).  This allocation breakdown between developed and emerging markets countries would have been approximately equivalent to that of the MSCI EAFE plus Emerging Markets Index in 2007. 


Although the DFA fund has slightly underperformed a comparable portfolio of ETFs since inception by about 0.18% annualized, it has been able to cover the majority of its underlying costs.  They have been able to do this despite the recent underperformance of value companies within developed markets.  For taxable investors, the case for using DFA instead of US-listed international ETFs is also strong.

Recovery of Foreign Withholding Taxes

Since the DFA International Core Equity Fund holds the underlying international stocks, taxable investors will receive a T3 slip at tax time, allowing them to recover some or all of the foreign withholding taxes levied.  This would have the potential to increase the after-tax return of the DFA fund (FYI – the annualized difference between the gross benchmark index return and the net benchmark index return used in our example over the time period measured was 0.43%).

A taxable investor holding a US-domiciled international ETF (i.e. EFA or EEM) would lose the initial foreign withholding taxes and be unable to reclaim them.  In other words, the DFA International Core Equity Fund is more tax-efficient than a comparable US-listed international ETF, when held in a taxable account.

Unfortunately for some advisors and DIY investors, access to DFA funds is not an option.  Although US-listed ETFs are sufficient for most registered plans, a Canadian-domiciled international and emerging markets ETF is desperately needed for taxable accounts.  BMO...I’m looking in your direction – a low-cost MSCI EAFE plus Emerging Markets Index ETF that holds the underlying stocks would be a welcome addition to the Canadian ETF landscape.

By: Justin Bender with 0 comments.
Filed under: DFA
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