Enhanced versus Traditional Indexation for International Mutual Funds: Evaluating DFA, WisdomTree and RAFI Powershares

Abstract

Do enhanced index funds beat traditional ones? The major companies that offer the new enhanced index international mutual funds are Dimensional Fund Advisors (DFA), RAFI, and WisdomTree. A major provider of traditional international index funds is DFA. We compare various enhanced international index fund portfolios from these providers with individualized benchmark portfolios composed of DFA traditional international funds. On average, (1) the RAFI power share portfolio out-returned its corresponding DFA traditional benchmark portfolio by 0.82%/year, (2) the average DFA enhanced portfolio under-returned by 0.14%/year, and (3) the WisdomTree portfolio under-returned by 1.01%/year. One cheer for enhanced international indexation and two for traditional indexation.

Keywords: Enhanced index fund, Fundamental indexation, Style analysis

JEL Classification: G11, G15