When I talk about the DFA mutual funds in which our money is invested I try to explain how they are like index funds, but not really – I admit this can be a confusing answer. First, an index fund can be defined this way…

An index fund is a mutual fund designed to match the components of a market index. Probably the most well-known example would be an index fund that is designed to track the performance of S&P 500 Index. Generally, index funds provide broad market exposure (thus reducing risk), low operating expenses (thus reducing fees) and low portfolio turnover (thus reducing the impact of taxes). In short, the saying “if you can’t beat ‘em, join ‘em” is perfect here.

DFA has released a short article explaining how index funds can be adversely impacted due to their requirement to strictly adhere to tracking a market index. The attached paper explains how DFA funds allow for more buying and selling flexibility than index funds thus reducing their costs to buy and sell, which, in turn, is a cost savings that is passed on to us, the investors in their funds.

I encourage you to give this article a read and to let me know if you have any questions.