How Are Dimensional Funds Different from Index Funds

Index Funds Are Good, We Think Dimensional Funds are Better

Our investment portfolios are built using a foundation of funds and ETFs from Dimensional Fund Advisors (DFA). The differences between DFA funds and index funds are subtle, but important. In this video Ark Royal Wealth Management Managing Principal Mike Palmer, CFP outlines the key differences and why we believe DFA funds offer investors the best opportunity for a successful investment experience. 

DFA Isn't Compelled to Buy or Sell

The evidence is clear – being compelled to buy or sell has a cost. Think about having to buy a car. If you are only interested in buying just a Lexus sedan, you loose flexibility. However, if you are willing to consider buying a Japanese luxury sedan your opportunity set increases, giving you more purchasing flexibility. Contrast this to an index fund focused on tracking error. If Tesla is added to the S&P 500 Index, the index fund manager is constrained by both when and what to buy. This comes at a cost. 

Dimensional is a Nimble Trader 

DFA uses a flexible trading approach that seeks to reduce costs. One tactic is considering many securities with similar characteristics as close substitutes for one another. Trading decisions are also influenced through the use of momentum as a trading barometer.  

DFA Thinks Markets are Preferable to Committees

DFA lets the market determine asset class composition. Using market pricing provides a more distilled asset class. Conversely, the S&P 500 Index is maintained by a committee that committee meets regularly to review and update the index. The committe requires any included security to have a certain market cap and cover the leading industries in the U.S. economy, providing a balanced representation across various sectors. They also consider qualitative factors such as the company’s reputation, stability, and market influence.

Dimensional Tilts Portfolios Towards Evidence-Based Drivers of Higher Expected Returns

There's ovewhelming acadmically-tested evidence that value, size, momentum and profitability are factors that drive higher expected returns. DFA has a sophisticated process of applying this science to actual portfolio construction. We invite you to watch our video to learn more.