Fund Selection

Fund selection is kind of where academic research meets reality. Building a portfolio in the real world can be more difficult than building one in theory. Once you have identified the types of asset classes that you want to use, you have to find a real world fund to invest in. Remember, you cannot invest in an actual index and not all index funds are created equally.

The way a fund company chooses to replicate an index for investors can have a big impact on whether or not that fund has similar results to the index it is supposed to mimic. Some indexes like the S&P 500 are fairly easy to replicate inexpensively, but other indexes may be more difficult. For the more difficult ones, index fund holdings may differ a good bit from the actual index. Remember, fund companies create products to make a profit more so than to be exact. Investors need to be mindful of this when they are choosing which funds to use.

Companies such as Barclays Global Investors, Dimensional Fund Advisors (DFA), State Street Global Advisors, and The Vanguard Group are well established providers of passively managed index funds. We currently use funds from Dimensional Fund Advisors because they offer the best combination of low fees and construction precision compared to any other group. The use of DFA funds also offers the best results when employing the Three Factor Model. Click here to learn more about DFA.