DFA U.S. Small-Cap Value Portfolio offers broad exposure to the small-cap value segment of the U.S. market. Its well-diversified portfolio, cost-effective execution, and competitive fee earn a Morningstar Medalist Rating of Silver.

This strategy targets the smallest stocks in the U.S. market—those that land in the bottom 10% by market cap. From that universe, DFA's portfolio managers focus on the cheapest third by price/book ratio. They further refine holdings by avoiding names with poor profitability and aggressive asset growth. Stocks with these characteristics have historically been associated with poor expected performance. The strategy weights stocks by market cap, which curbs turnover and the associated trading costs. Dimensional launched an exchange-traded fund in February 2022 that follows the same underlying process.

DFA’s traders build on that cost-effective approach. They select trades from an eligible pool provided by the fund’s portfolio managers. Traders can substitute a given stock for another with similar size and value characteristics, and they can trade patiently to further cut back on transaction costs and taxes.

The portfolio lands among the broadest and most diversified in the small-value Morningstar Category. It holds more than 900 stocks, while its 10 largest positions represent about 8% of assets. The fund’s price/book ratio has consistently been lower than the Russell 2000 Value Index. But avoiding stocks with poor profitability tilts the portfolio toward more-profitable names, on average.

Compared with the index, the portfolio has greater exposure to the value factor, which tends to drive its index-relative performance. It trailed the index by 3.1 percentage points per year between October 2014 and March 2020, when stocks trading at lower valuations performed poorly. More recently, it beat the index by 11.1 percentage points annualized between December 2020 and March 2023, when the value factor came back to life. The ETF has followed a similar path over its short life. The expense ratios for the mutual fund and ETF land in the cheapest quintile of the small-value category.

Analyst Rating

A potent and cost-effective small-value strategy.

Senior Analyst

Daniel Sotiroff

Mohawk Industries

Commercial Metals

Taylor Morrison Home

Murphy Oil

PBF Energy

F.N.B. Corp.

Avnet

MGIC Investment

Assured Guaranty

This cost-conscious approach to small stocks trading at lower valuations has a lot to offer. Its broad diversification and flexible trading approach should help it outperform the Russell 2000 Value Index over the long run. It earns an Above Average Process Pillar rating.

Above Average

Process

DFA’s multimanager team structure and global network of trading desks support an Above Average People Pillar rating. The portfolio managers on this fund collaborate with the firm’s trading desks to execute this strategy in the most cost-effective way possible. Spreading management responsibilities across several managers reduces the impact of personnel turnover when it does occur.

Jed Fogdall is the longest-tenured manager on this fund. He started at DFA as a portfolio manager in 2004 and has helped manage this fund since February 2012. Fogdall heads the firm’s global portfolio management team and chairs its investment committee.

Joel Schneider and Marc Leblond also serve as managers on this fund. Schneider has been with DFA for close to a decade and is the firm’s deputy head of portfolio management for its Austin office. Leblond is a relative newcomer. He has been with DFA since 2015 and became a named portfolio manager on this fund in February 2020. Joseph Hohn is a senior portfolio manager that helps manage the ETF.

This team executes strategies built by DFA’s research department, which is helped by a number of prominent academics who serve as consultants. They vet the latest research and pursue only strategies that they find 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 Small Cap Value ETF

DFSV actively invests in broad and diverse portfolio of US small-cap companies. Stock selection is based on value characteristics and weighted by market capitalization.

Dimensional US Small Cap Value ETF is a low-cost, actively managed small-cap value fund with a long history of beating its benchmark Russell 2000 Value Index. AUM is under $3 billion, far below some peers. On rolling five-year returns since August 2000, the DFSV ETF and its Institutional Class Fund outperformed 71% of the time, with the success rate gradually increasing as your holding period lengthens. This is good evidence the proprietary value strategy, which selects nearly 1,000 stocks with market caps as low as $14 million, works. However, other actively managed funds are doing well, too.

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DFSV is a mostly solid small-cap echelon-focused actively managed ETF. As it frequently happens with funds looking promising on the surface, there are a lot of nuances beneath it. My analysis showed that mid-caps, not their smaller counterparts, have an outsized impact on the fund's performance due to the weighting schema. While attractively valued, DFSV's portfolio is burdened by a meaningful share of low-quality stocks, a mix that I believe is worth avoiding in the current macro situation.

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