One of the most common questions we receive is why certain holdings in our portfolios do not closely track widely followed market indexes, such as the Russell 3000. It is a reasonable question, and an important one.
The answer lies in how our portfolios are intentionally designed and what we believe leads to better long term outcomes.
Market Capitalization Indexes vs Evidence Based Investing
Traditional market indexes, like the Russell 3000, are market capitalization weighted. This means companies are held based solely on their size. As a company’s stock price rises and its market value increases, it automatically becomes a larger part of the index regardless of valuation, profitability, or expected future returns.
Funds like Dimensional US Core Equity ETF are built very differently. Rather than simply replicating the market, Dimensional funds are structured around decades of peer-reviewed academic research that identifies characteristics, associated with higher long-term expected returns. These include exposure to:
- Smaller companies
- More profitable companies
- Companies with lower relative prices, often referred to as "value" stocks
Our investment philosophy is grounded in this research. We intentionally emphasize these characteristics because they have historically been rewarded over full market cycles, even though they may not lead in every environment.
Why Performance Can Differ from Year to Year
Because these funds are designed to look different from traditional indexes, they will not move in lockstep with headline benchmarks. In periods when large growth companies dominate market returns, factor-based strategies can lag popular indexes and category averages.
At other points in history, when value stocks and smaller companies lead, these same strategies have tended to outperform. This pattern of divergence is expected. It is not a flaw in the approach, but a natural result of owning a diversified portfolio that is not built to chase recent winners.
A Note on Morningstar Ratings
Morningstar ratings often come up in conversations about performance. These ratings are driven largely by recent returns, relative to a defined peer group. That framework assumes the funds being compared are built the same way and are trying to achieve the same outcome.
The funds we use are intentionally different from their peers. Comparing a factor based strategy to traditional category averages is often an apples to oranges comparison. When recent performance dominates the rating methodology, strategies that diverge from the crowd can appear less attractive even when their design and long-term rationale remain sound.
For this reason, Morningstar ratings are not a reliable way to evaluate whether a strategy is appropriate for a long-term investment plan, or whether it improves diversification and expected outcomes.
Designed with the Long-Term in Mind
Our allocation to Dimensional funds reflects a deliberate choice to focus on long-term expected return, diversification, and discipline, rather than short-term rankings or index matching.
In our view, this is not a compromise. It is a core feature of thoughtful portfolio design.
If you would like to discuss how this approach fits into your broader financial plan, or explore alternative ways to express these ideas within your portfolio, we are always happy to continue the conversation.