DFA US Core Equity 2 is a well-diversified strategy with some mild factor tilts and a low fee that should provide a long-term edge.

The fund offers broad exposure to stocks of all sizes listed in the US, and it tilts toward those with lower valuations, higher profitability, and smaller market capitalizations. To do this, the managers assign weights based on a stock’s market cap and a market-cap multiplier. They apply larger multipliers to stocks with smaller market caps, lower valuations, and higher profitability and smaller ones to stocks with opposite characteristics. This is the same process used to build DFA US Core Equity 1 DFEOX, but the factor exposures on this fund are a little stronger.

This technique has two advantages. First, it tilts toward factors that have historically been associated with superior long-term returns, which should give the fund an edge when those styles are in favor. Second, it cuts back on turnover and trading costs because a stock’s market cap is incorporated into the weighting scheme. Overall, the portfolio’s turnover ratio and diversification rank among the best in the large-blend Morningstar Category.

The portfolio’s value and small-cap orientations have been persistent. Its emphasis on profitable firms has been less obvious because smaller and cheaper stocks tend to be less profitable than their larger and faster-growing counterparts. But the fund’s profitability tilt is still at work, even if its holdings on average generate lower returns on invested capital than the market. The inclusion of profitability should steer the portfolio away from the riskiest names in the market.

This portfolio’s value orientation has caused it to modestly lag the category benchmark. The mutual fund trailed the Russell 1000 Index by 56 basis points per year from its launch in September 2005 through March 2024. It performed better in 2022 as the value factor’s performance picked up. The mutual fund and exchange-traded fund sport low fees that land well within the cheapest decile of the category and should provide a long-lasting advantage.

Analyst Rating

Modest factor tilts should provide a long-term advantage.

Senior Analyst

Daniel Sotiroff

Microsoft

Apple

NVIDIA

Amazon

Alphabet

Exxon Mobil

Eli Lilly

JPMorgan Chase & Co

This strategy diversifies risk while tilting toward stocks associated with market-beating returns in a cost-effective manner. It earns an Above Average Process Pillar rating.

Above Average

Process

The strength and collaborative nature of Dimensional’s managers and traders earns an above-average People Pillar rating. Seamless integration with the firm's trading desks characterizes its approach and ensures it executes strategies in the most cost-effective manner.

The team and the portfolios it oversees benefit from a multimanager structure that ensures continuity. It mitigates the risks associated with personnel changes by distributing management responsibilities across several individuals.  Dimensional's rigorous internal onboarding process for portfolio managers, which encompasses comprehensive training in all facets of portfolio management and trading, further supports this stability. The process is hands-on and closely supervised by seasoned managers. All managers and traders are well-equipped to interchangeably backfill roles as needed and maintain operational integrity.

Dimensional's commitment to excellence extends to the evaluation of its managers, who are assessed on their ability to adhere to the fund's risk parameters, process improvements, and overall management efficacy. The management team implements strategies developed by Dimensional's research department, which is renowned for its academic rigor and the practical application of its findings. Researchers are selective in their strategy choices, favoring those that are sensible, robust, persistent, and cost-effective.

People

Dimensional’s mutual fund business has faced some tough challenges over the past few years. Despite large and persistent outflows, the firm has remained steadfast in its philosophy and responded in a way that benefits clients while improving its competitiveness. Dimensional maintains its High Parent Pillar rating.

More than $80 billion left Dimensional’s mutual funds between 2020 and 2022, but its response to the turmoil has been admirable. The firm started reducing fees in early 2020, and it continued the effort with three additional rounds of cuts.

Dimensional’s endeavor into exchange-traded funds was the biggest step it took to shore up its business. The firm converted seven tax-managed mutual funds to ETFs between mid-2021 and mid-2022. Along the way, it launched an additional two dozen that largely follow the same strategies underpinning the existing mutual funds. The firm also reinvested in its separate accounts platform by bolstering the technology used to manage these portfolios. The effort was aimed at improving operational efficiencies.

These measures appear to be paying off. The firm’s new ETFs have proved popular among its clients. In 2022, they brought in enough new money to nearly offset the outflows from its mutual funds. The separate account platform’s operational improvements, along with the new ETF lineup’s tax efficiency, should benefit clients and strengthen the firm’s prospects.

High

Parent

Dimensional US Core Equity 2 ETF

DFAC actively selects US equities of all sizes with a tilt toward small-cap companies, seeking to provide long-term capital appreciation.

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