One Vanguard, Many DFAs (Part 1)

The mutual fund industry’s two indexing leaders have left different legacies.

John Rekenthaler 26 April, 2016 | 17:28
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The Genesis
The history of U.S. mutual fund indexing is Vanguard versus Dimensional Fund Advisors. In 1976, Vanguard introduced what was then called First Index Investment Trust, a fund that replicated the S&P 500. Five years later, DFA launched its U.S. 9-10 Small Company Fund. Every mutual fund indexing entrant since that time has been a historical footnote.

The companies are not only today’s two biggest mutual fund indexers (with Vanguard being substantially larger, of course) but also neatly encapsulate a key debate of indexing: Should indexers own the entire marketplace, on the theory that the wisest man is the man who realizes that he knows nothing and who therefore will not attempt what must surely fail? Or should they use academic research to shape their funds so that they hold some market segments but not others?

Broad and Narrow
Vanguard took the first path. Its initial fund covered about 80% of the U.S. stock market, by capitalization. In 1992, the company launched Vanguard Total Stock Market Index (VTSMX, available in the U.S.), which expanded the exposure to U.S. stock market assets to something near 100% (practical constraints preventing the ideal from being achieved). Similarly, the company’s international-stock indexes progressed from the broad debut funds of Vanguard Pacific Stock Index (VPACX, available in the U.S.) and Vanguard European Stock Index (VEURX, available in the U.S.) to, a few years later, the even-broader  Vanguard Total International Stock Index (VGTSX, available in the U.S.).

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About Author

John Rekenthaler  is vice president of research for Morningstar.

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