How Much Are You Paying for Your Size and Value Tilt?

It’s becoming clear that the price for overall U.S. equity market exposure is close to zero. Many market-cap weighted index funds and exchange-traded funds from Vanguard and others are charging expense ratios of five basis points (bps) or less. An interesting, and more difficult, question to answer: How much are you paying to gain exposure to small-cap and value stocks across the funds in the marketplace? This is more difficult to answer because a fund that calls itself “small cap” may own stocks that are materially smaller than another fund that also has “small cap” in its title. The same is true for funds with the word “value” in their names.

I explore one methodology here by running Fama-French three-factor regressions for a large number of Vanguard and DFA funds and using the output to tease out how much additional expense ratio investors are paying on average for small-cap and value exposure, respectively. (Anyone who is interested in the exact methodology can email me. The details are too laborious to include in the blog post.)

Using data from the 48 Vanguard and DFA U.S. equity funds included in the analysis, Figure 1 presents the bps expenses investors are paying on average for small-cap and value exposure through Vanguard and DFA (for Vanguard, I use only Admiral and Institutional open-ended index mutual fund share classes).


With the entire set of funds used in the analysis, we see investors are paying on average about seven bps for one unit of size exposure and about 27 bps for one unit of value exposure. Since a strong argument can be made that different fund companies price fund expense ratios using different methodologies, I think it’s more interesting to examine Vanguard and DFA separately. Figure 2 presents the same analysis using the 31 Vanguard funds includes in the data set.


Very interestingly, we see that Vanguard does not appear to price its small-cap and value funds any differently from its large-cap and growth funds. I say this because both bars in Figure 2 are very close to zero (notice that the scale is different from Figure 1). Here’s the same analysis using the 17 DFA funds.


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We see that DFA tends to price one unit of small-cap exposure at about 31 bps and one unit of value exposure at about six bps (although the value result is statistically insignificant). Given the statistical strength of the small-cap result, DFA clearly appears to be factoring in whether a fund is small-cap versus large-cap oriented in setting the expense ratio.

This commentary originally appeared April 2 on