r/investing
DFUS seems like a better solution (than VTSAX) to avoid trillion-dollar IPOs that want to sneak into Index Funds. Got any other solutions?
Author argues DFUS beats VTSAX in avoiding unprofitable IPOs and hedge fund front-running via value tilt and profitability screens.
- DFUS mechanically underweights or excludes overvalued securities with high P/B and P/E ratios.
- Its profitability screen prevents highly unprofitable IPOs from being automatically added to the fund.
- It lacks fixed rebalancing dates, protecting passive investors from hedge fund front-running.
What is DFUS:
A semi-actively managed index fund that encompasses US broad market. Very similar to VTSAX but the actively managed portion of it tries to address the market inefficiencies exploited by 3rd parties like Hedge Funds (and now unprofitable trillion-dollar IPOs that want to escape price-discovery in the open market).
How DFUS gives an added layer of protection (compared to VTSAX):
- DFUS's value tilt mechanically underweights or excludes securities with very high price-to-book and price-to-earnings ratios
- DFUS also has a profitability screen that wouldn't allow these highly unprofitable IPOs to be automatically added
- The third and final advantage DFUS has over large indexes is it doesn't have fixed buying/selling dates - which could potentially be used by Hedge Funds to time their trades so they profit off of passive investors
To the people in the comment section who will inevitably argue this is "nothing-burger"
- If 0.1% of your portfolio is nothing burger, please send that my way. Thank you.
- This is not about profit, this is about principle. I don't want any IPO skipping price-discovery phase and going straight into our retirement accounts. That's just not how capitalism should work.
Comparison of VTSAX vs DFUS at stock analysis:
https://stockanalysis.com/etf/compare/dfus-vs-mutf:vtsax/ (filter by last 5 years since DFUS started in 2021)
Past performance is not a guarantee of future yields. This is not financial advice. Do your Research.
Got any other solutions? I'd like to hear them.
No solutions, just trade-offs. I don't like these mega IPO shenanigans. It would cost me a recurring fee to open up other choices in my 401k. I like that even less.
S&P 500 declined to make an exception for these mega ipos. Add a mid and small cap of your choosing and your back, but with some re-balancing to do annually.
At least for me, Fidelity allows trading in my 401k without additional fees.
Annual rebalancing is probably the way to go for you, but I'm guessing many bogleheads would just rather not do that.
DFUS, unlike many other DFA funds, DOES NOT VALUE TILT.
Your right! DFUS seem to have very minimal value tilt (if any). Do you know where to find exact numbers?
Maybe DFAC is a better solution?
Could just go with the “plain Jane S&P 500” as their flagship indexes will not bend their seasoning/profitability screens for mega-IPOs.
On the flip side, one could add a slight CRSP or Russell 1000 index “slice” if wanting a tad diffused via the other holdings.
And it’s just a coincidence that you only started looking after SpaceX was announced to IPO?
At VTSAX, it will be less than 0.2% probably. Even if SPCX goes down to $0, it will be just a noise.
To the people in the comment section who will inevitably argue this is "nothing-burger"
- If 0.1% of your portfolio is nothing burger, please send that my way. Thank you.
- This is not about profit, this is about principle. I don't want any IPO skipping price-discovery phase and going straight into our retirement accounts. That's just not how capitalism should work.
Do you have the same attitude for the 5% of small cap growth stocks sucking your gains like a black hole because they’re drowning in debt, losses, and their valuations run purely on hype. Or the REITs that drag down your portfolio with tax drag? Or the emerging market stocks with currency manipulation, corrupt governments, shady accounting practices, dictatorships, warfare, lax regulations, and rocky economies? Because I guarantee you these stocks kill a hell of a lot more than just .1% of your portfolio
Given DFUS has a ER of 0.09%, it’s more of a nothing burger when other funds have an ER of 0-0.03%.
This is not about profit, this is about principle.
I'd rather pay and expense ratio that would meaningfully work in my favor (according to Fama and French Three Factor Model) than giving away that money to IPOs that evade price discovery.
S&P is not changing its rules for inclusion, only NASDAQ, so just stay in spy if you are worried about price discovery phase. Also don’t think this has anything to do with “how capitalism should work”
I'm neither talking about S&P nor NASDAQ. I'm talking about broad market funds like VTSAX.
Maybe we have different ideas of what capitalism is, but relying on the passivity of millions of investors to prop up your IPO is not my idea of business integrity. But hey, you're entitled to your opinion.
DFUS (none), DFAU (light), DFAC (aggressive), AVUS (moderate)
Once the market is freely tradeable with sufficient volume compared to market cap that to me is price discovery.
Which brings me back to my original point. Broad market index funds already hold a ton of garbage that drag down returns, far more than SpaceX. It doesn’t make sense that you’re more than willing to lose money on those stocks but SpaceX is just too much for you.
People are in things like VTSAX to avoid the somewhat arbitrary activist decisions of the SP500 and Nasdaq committees. A "total market" fund is designed to be total market as such including things like the SpaceX IPO is pretty much the whole point.
just stick with S&P500 for now.
or if you want mid and small cap, SPTM for the 1500 composite.
The index inclusion issue with mega-cap IPOs is real and worth thinking about. DFUS and similar Dimensional funds use a profitability and value screen that naturally limits this exposure, which appeals to people who are bothered by buying something at any price just because it got big enough. In my experience the fee difference from VTSAX is modest and the factor tilts have long-term historical support. Whether the IPO-exclusion effect is worth it is harder to measure, but the underlying portfolio construction philosophy is sound.
DFUS is a good replacement to VTI for right now, since VTI will include SpaceX in the first 5 days
This is not about profit, this is about principle.
If your principle is "never invest in index funds", yeah, don't invest in VTSAX.
And it seems like that is your real issue. Buying the entire market means ... buying the entire market.
This isn't really about SPCX; it's about active management vs indexing.
I wouldn't be worried about index funds if trillion-dollar IPOs with questionable valuations were not entering the market.
Funds like DFUS and AVUS are somewhere in-between active and passive. They have relatively low expense ratios and enact simple exclusion criteria like profitability and price-to-book ratios that remove meme stocks.
The question I'm asking is "does anyone else have other recommendations for such semi-passive funds." That's all I'm asking. If you just want to VTSAX and chill, you do you. I'm not here to change your mind. I'm here to see what other options there are.
Yeah all of the funds are great and not really that expensive for an actively managed solution, even AVUS being the most expensive is only 15 basis points.
SpaceX will only trade at 5% of the company. In what way are index funds going to prop up SpaceX any more than it props small IPOs.
Sure, that's how float values work. Even if you compare 5% float of 1.77 trillion, that's going to be several orders of a magnitude larger than a typical IPO.
At this point I am done talking with you. You fail to read my original post, you keep circling back without trying to understand any of my concerns. You're wasting my time.
I am not going to waste another single brain cell talking to you about it.
Just buy ITOT. S&P has its own profitability filter. That fixes all of this for you… don’t overthink this
I agree, S&P is good for those seeking large cap. Not dissing on anyone who is good with that.
I'm personally looking for broad market exposure. Hence the question.
ITOT is composed of U.S. companies across all market capitalizations. It has 2,500 holdings. It is broad market exposure.
Hence the response…
If you’re looking for another 1,000 companies to get exposure to then how exactly do you plan on fitting them in there?? Those 1,000 hypothetical companies are very likely to all be unprofitable. And you want to tilt your portfolio towards companies that don’t make money?
By all means please do!
Didn't realize ITOT was broad market. My bad. I'll look into it. Thanks for the suggestion!
just short SPCX with the weight it's in the index if it bothers you that much
What an enlightened take! You think I (or anyone else) has a crystal ball to time the inevitable collapse?
Blocking you from interacting with me. I have no patience for this nonsense.