How to beat Vanguard - DFA’s Factor Science approach and its role in Defined Outcome Investing’s Three-Bucket Strategies combine to Transform Long-Term Results"

Defined Outcome Investing (DOI) is about much more than picking the best funds. It’s a modern, evidence-based framework that blends three strategic “buckets”—each with a unique purpose—to create a portfolio that balances growth, protection, and behavioral discipline through all market cycles.  Perhaps most importantly, the DOI approach brings back many of the powerful benefits that Dollar Cost Averaging provided investors during the accumulation phase of their portfolios.  This powerful combination provides the blueprint to crush the Vanguard approach to index investing.

The ideal DOI portfolio combines three important equity alloacions:  First, an allocation to traditional stock exposure or, as we like to call it, a “Naked in the Market” allocation.  Second a defensive Capped-Buffered safety, and finally, a defensive Target allocation.  The powerful combination, combined with strategic periodic rebalancing, can provide both superior long term pure returns and greatly superior long term risk adjusted returns.  It’s simply a superior system vs. the traditional portfolios, such as the low cost index funds offered by Vanguard, which rely almost solely on diversification and “hold on for the ride” approach to investing.  By adding the Defense of DOI in equities and by recapturing the powerful benefits of dollar cost averaging, investors are able to achieve a higher level of protection in crashing markets and simultaneously achieve superior long-term returns . 

In this article, we are focusing on one of the three critical allocations in DOI equity investing – The Naked in the Market (traditional stocks) allocation.  This allocation is usually the growth driver in your portfolio during bull markets.

Here we pit Vanguard’s passive index approach against the powerful “smart index” approach of Dimensional Fund Advisors.  Here we answer the question – What fund family, or approach to investing, delivers the greatest edge not just in academic theory, but in long-term, real-world results for both retail do-it-yourselfers and professionals? 

In 2025, all evidence points to DFA as the gold standard, with Vanguard a worthy opponent but no match for DFA head-to-head and really not even a contender to DOI equities as a whole.  

The Three Buckets: Holistic Structure for Real-World Success

DOI divides equity allocation into three carefully constructed strategies:

• Naked in the Market: This is pure stock investing—no buffers, no downside protection; just raw equity exposure with the full risks and rewards of the market. It’s the star in bull markets, compounding growth and powering long-run returns.
• Capped-Buffered: This bucket provides annual upside caps which often capture 100% of the upside in typical up markets but which will lag in outsized or amazing up years.  But in return for accepting a Cap to returns, it limits downside risks, smoothing out losses in bear markets and allowing for “buy the dip” reinvestment using protected capital.
• Target Strategy: Delivers strong but not all the market upside performance each year but targeting full or significant downside cushioning each year. This strategy helps maintain growth when markets are turbulent but not crashing, reducing overall volatility.  It is the absolute star when markets crash by protecting principal and allowing investors to “buy the dip” systematically.

Simulations and historical studies confirm that all three buckets are needed: during bull runs, the growth bucket shines, but when markets crash, the defensive buckets protect against devastating losses and create opportunities to “buy low.” Periodic rebalancing between the buckets—DOI’s modern twist on dollar cost averaging—turns market volatility into opportunity, not just risk. 

Let’s focus in this article on the “Naked in the Market” position by comparing two top candidates:  Vanguard vs. Dimensional Fund Advisors.

Why Do-It-Yourself Vanguard Investors Miss Out

Most DIY Vanguard investors dramatically outweigh the S&P 500 or Nasdaq funds, holding little-to-no small-cap, value, or meaningful international exposure. Vanguard excels at providing low-cost access to the entire U.S. (and global) market through indexing strategies, but studies show that their actual investors all too often reliably “hug” the biggest domestic indexes for simplicity and familiarity: 

• The S&P 500 fund accounts for the lion’s share of self-directed assets, with many investors also adding a Nasdaq/technology tilt. 
• Even “total market” funds (like VTI) are 75–80% identical to the S&P 500—offering minimal access to the small-cap, value, or profitability premiums DFA portfolios target and harvest. 
• DFA’s five factor approach, which puts to work the Nobel prize winning academic theories, has now created decades of real world results which produce undeniably impressive results.  These “smart index” portfolios tilt toward the Warren Buffet value focused and small capped focused style of investing to create superior long-term performance. 

Expense Ratios and Transaction Costs: No Longer the Deciding Factor

Both DFA and Vanguard set the standard for low costs:

• Vanguard index funds: 0.03–0.06% average expense ratio is a leader in low cost funds.
• DFA institutional funds: 0.11–0.27%, now widely accessible through advisors and institutional platforms are similarly extremely low cost.
• Transaction fees: negligible or nonexistent on both platforms, especially as both now offer ETFs and low-friction tax efficient trading environments.

With cost differences all but eliminated, the real performance edge comes from portfolio construction and disciplined implementation. 

The DFA Advantage: Persistent, Broad, and Documented

Overall Outperformance—Not Just Small/Value, But Across the Board

DFA’s edge isn’t an accident or luck—it’s the direct result of daily, research-rooted factor targeting and fund construction:

• DFA’s core U.S. equity and global funds have consistently provided higher long-term compound and risk-adjusted returns than both Vanguard and industry averages. 
• While the largest excess returns appear in small-cap, value oriented stocks, and international buckets (often an astounding 1–3% higher return per year), DFA’s advantage is still measurable in both diversified core and balanced portfolios. 

This “broad performance advantage” is achieved not by chasing returns, but by methodically engineering funds for persistent exposure to the drivers of long-run returns.

Numbers to Know:

• In bull markets, DFA’s “naked” allocations often earn 1–3% more per year than the S&P 500 or total market index portfolios most DIY investors use. 
• Over multi-decade periods, a 1% return edge—compounding annually—yields over 20% more wealth in retirement. A 2–3% edge can double or triple the value of the “Naked in the Market” bucket over a typical investor’s lifetime. 

Five-Factor Engineering: Market, Size, Value, Profitability, Investment

Unlike simple market-cap indexes, DFA portfolios are engineered to capture five academic “factor” premiums:

1. Market risk—like all pure stock funds.
2. Size premium—smaller companies, which outperform over decades.
3. Value premium—undervalued stocks outperforming overpriced ones.
4. Profitability premium—companies with higher earnings margins do better.
5. Investment premium—firms that reinvest wisely, rather than recklessly, provide better returns.

DFA aligns portfolio weights to drive persistent exposure to each factor, and—with Nobel Prize-winning economists Eugene Fama, Myron Scholes, Robert Merton, Merton Miller, and Douglas Diamond at the helm—these factors are neither fads nor marketing buzzwords: they are the foundation of modern portfolio theory and real-world results. 

Largest Outperformance: Small Cap, Value, and International Buckets

• Small Cap and Small Value: DFA’s disciplined tilts toward small and value segments have produced 1–3% annual outperformance compared to both major index funds and factor-tilted Vanguard alternatives. 
• International/Global Small and Value: DFA regularly delivers 2–3% per year excess return over mainstream (and often Vanguard) funds in these segments—benefitting from less competition, deeper research, and more efficient trading. 

These “factor” exposures are rarely captured by DIY investors with S&P 500-heavy portfolios or by simply adding a little small-cap here and there. DFA’s daily process ensures near-total purity in factor exposure, translating into persistent, not sporadic, outperformance.

Style-Adjusted Efficiency: The Difference in Implementation

Vanguard, acknowledging the edge, now offers factor ETFs designed to mimic DFA’s style:

• Vanguard’s factor ETFs can help close the gap, but they don’t rebalance or adjust exposures with anywhere near DFA’s discipline or frequency. 
• DFA minimizes tracking error, reduces unwanted turnover, and actively adapts positions based on daily liquidity and pricing opportunities—something index funds and static factor portfolios can’t replicate. 
• The result: DFA achieves higher realized factor premiums and smoother risk outcomes, proven by persistent outperformance in both up and down cycles.

Nobel Pedigree and Academic Rigor

No other fund family boasts active input and oversight from five Nobel laureates. DFA’s process is not only grounded in financial theory, but actively evolves as new research emerges:

• Eugene Fama (father of the “efficient markets hypothesis” and modern factor investing) and partners have shaped nearly every element of DFA portfolio construction. 
• This translates directly to client portfolios-DOI portfolios using DFA are built on the latest, most robust science, not blind faith in marketing or past performance.

Survivorship and Fund Permanence: Quality Means Staying Power

Perhaps the greatest evidence of DFA’s advantage is what it does not do: DFA rarely culls or closes funds. The survivorship data:

• Less than 2% of DFA funds have closed in the past 20 years, compared to closure rates around 20% at Vanguard and 40–50% industry-wide. 
• Over 90% of DFA funds survive 20+ years, while 75% or more outperform their benchmarks and peer groups. The industry average for surviving and outperforming funds is just 15–20%.

The industry lives off survivorship bias by closing failed funds and no longer reporting their performance.  At DFA, there is almost no survivorship bias.  DFA relies not on gimmicks but instead a quality filter: DFA only launches funds it expects to endure and win, and the data say it delivers.

DFA as Industry Benchmark (and the Best Compliment: Vanguard Copies)

• Vanguard’s move into factor ETFs is the sincerest compliment—but Vanguard’s copies are broader, slower to rebalance, and less precise.
• DFA’s Nobel-driven research and real-time trading keep it in the lead for those seeking academically proven, real-world results for the naked stock bucket and beyond. 

Advisor Advantage: Why Professional Guidance Matters Even More

Every study shows that DIY investors—whether in Vanguard, DFA, or other funds—miss crucial advantages without professional advice:

• Advisors optimize rebalancing, harvest behavioral mistakes, structure tax management, and help clients stay disciplined.
• A major 2025 DFA study found investors with professional oversight saw up to a 2% increase in annual “advisor alpha” versus self-directed DFA investors (and a much bigger advantage over undisciplined S&P 500-focused portfolios). 

Table: DFA vs. Vanguard & Industry

Building the Ultimate DOI Portfolio: Why All Buckets are Essential

DFA is the star in the “Naked in the Market” role:

• Compounds growth fastest during bull markets.
• Frequently delivers 1–3% annually over S&P 500 and generic total-market funds.
• Underlying science and processes ensure the return lead is not just luck—but engineered.

Defensive buckets (“Capped-Buffered” and “Target Strategy”) are the stars when adversity hits:

• Capture opportunity by protecting gains during downturns.
• Provide “dry poweder” for dollar cost averaging into stocks at lower prices.  
• Reduce behavioral mistakes and help maintain cash flow for retirees by providing withdrawal stability simply absent in a traditional pure stock portfolio.

The synergy of all three strategies, with periodic rebalancing and disciplined reallocation, is what lets DOI outperform traditional stock portfolios that rely solely on diversification for defense in what Wallstreet calls a “Buy and Hold” strategy – DOI proponents call this “Buy and Hope” strategies as diversification alone is not enough.  DOI proponents add true defense so that investors can boost effective return while smoothing volatility through all economic environments.

Bottom Line: DFA Wins the Growth Race, Advisors Bring it Home, DOI Wins the Decathlon

• DFA is unmatched for persistent, robust growth in the unprotected equity bucket—especially versus the S&P 500-heavy portfolios favored by most DIY investors.
• Vanguard may offer lower fees, but DIY portfolios without true factor exposure or skilled rebalancing routinely lag DFA. Vanguard’s own shift toward DFA-style funds proves the point.
• Professional guidance amplifies DFA’s edge, ensuring that rebalancing, tax management, and behavioral coaching maximize realized returns.
• But DOI’s genius is in combining all three buckets—using DFA as the race car but pairing it with risk management and steady guardrails, letting investors win the real marathon of retirement wealth.

Investing success isn’t about chasing one star—a truly robust, risk-smart plan uses every tool and every bucket at its best, with DFA’s elite factor science powering the journey, the defensive strategies steering around big roadblocks, and the whole approach managed for discipline and peace of mind.

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