🧭Navigating the Market with DFAU: Simplicity Meets Strategy

In partnership with

Hello, ETF UNO Community! Today's spotlight will discuss the Dimensional U.S. Core Equity Market ETF (DFAU). This ETF offers broad exposure to the U.S. market and uses a systematic approach to enhance returns potentially. As the ETF landscape grows, finding ETFs that blend research with practical use is important. The DFAU reflects Dimensional Fund Advisors' extensive financial research in an accessible format. Let's see what makes this fund stand out and whether it fits your portfolio well.

Here’s why workplace life insurance might not be enough

Unexpected events shouldn't leave your loved ones financially exposed. And while employer coverage is a nice perk, it usually only offers 2x your salary – far below the recommended 10-15x for real security (especially with dependents). Term life insurance can bridge the gap with customizable, affordable plans. Money’s Best Life Insurance list can help you find coverage starting at just $7/month, providing the peace of mind your family deserves.

FIND PROTECTION

What is DFAU?

The Dimensional U.S. Core Equity Market ETF (DFAU) aims for long-term capital appreciation by providing comprehensive exposure to the U.S. equity market. Its unique strategy focuses on three key areas:

1. Higher Expected Returns: DFAU prioritises investments in securities with strong growth potential while maintaining broad market coverage.

2. Flexible Approach: Daily adjustments allow the ETF to focus on high-potential securities and adapt to market changes, all while targeting long-term growth.

3. Competitive Pricing: DFAU is competitively priced and ranks in the lowest cost quartile among its Morningstar category peers.

This multifactor approach is deeply rooted in the academic research of Dimensional Fund Advisors, the issuer behind DFAU. Founded in 1981, Dimensional has established itself as a pioneer in translating scholarly research into practical investment solutions. The firm manages over $750 billion in assets globally and has built its reputation on a few key principles:

• 📃Academic Foundation: Dimensional maintains close relationships with leading financial economists, including Nobel Prize winners, who serve as directors and consultants. This academic connection ensures their investment approach remains grounded in rigorous research.

• 🖥️Systematic Implementation: Rather than relying on subjective forecasts or market timing, Dimensional employs systematic, rules-based strategies informed by decades of market data and research.

• 📈Efficient Trading: As a significant market participant, Dimensional has developed sophisticated trading capabilities to minimise costs while effectively implementing its investment strategies.

• 🪴Long-term Perspective: The firm emphasises that its investment approaches are designed to capture return premiums over meaningful time horizons, not as short-term tactical plays.

Investment Strategy📊

Incorporating DFAU into an investment portfolio requires understanding its function and how it complements other assets. Here are several strategic approaches to consider:

• 🛰️Core Holding Strategy: The most straightforward implementation is using DFAU as a core U.S. equity holding. With its broad market coverage and strategic tilts toward factors associated with higher expected returns, DFAU can serve as the foundation of the domestic equity portion of a portfolio. This core-and-satellite approach allows you to maintain broad market exposure through DFAU while expressing specific views or seeking additional diversification through complementary holdings.

• 🧩Factor Diversification Strategy: Another implementation strategy involves using DFAU as part of a multi-factor portfolio. While DFAU incorporates size, value, and profitability factors, you might consider combining it with ETFs focused on other factors.

• 🌎Global Allocation Framework: DFAU can also serve as the U.S. component within a globally diversified portfolio.

No matter your chosen implementation strategy, it's important to have a disciplined rebalancing approach. When dealing with DFAU, consider rebalancing your portfolio when your allocation deviates by more than 5-10% from your target. Based on relative thresholds, this method can help minimise unnecessary trading while ensuring you maintain discipline in your portfolio management.

DFAU at a glance

ETF Issuer: Dimensional Fund Advisors

Inception: 2020-11-17

Asset Class: Equity

Underlying Index: it is an actively managed ETF

Geographical Focus: U.S.

Expense Ratio: 0.12% (as of last data point)

Dividend Yield: 1.12% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

DFAU's performance highlights the effectiveness of its factor-tilted approach across various market conditions. Since its inception, it has delivered around 14.4% annualised returns, outperforming broad market indexes like the S&P 500. This modest outperformance underscores the benefits of DFAU's factor tilts, particularly in favourable growth and value market periods.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Evidence-Based Investment Approach: DFAU applies decades of academic research to market factors that have demonstrated persistent return premiums over long time horizons. The size, value, and profitability factors targeted by DFAU have been extensively documented in academic literature, providing a strong theoretical foundation for the ETF's investment approach.

2. Balanced Factor Exposure Without Market Timing: Dimensional employs a flexible trading approach, unlike some factor ETFs that follow mechanical indexes with predetermined rebalancing schedules:

   • Minimise unnecessary turnover by using wide trading bands

   • Avoid trading during unfavourable market conditions

   • Consider momentum when implementing trades to avoid "catching falling knives"

   • Balance competing objectives across multiple factors

   This implementation expertise may be particularly valuable for the size and value factors, where naïve implementations can incur significant trading costs or inadvertently concentrate in less liquid or financially distressed companies.

3. Dimensional's Implementation Expertise: Dimensional's extensive experience with factor strategies enables them to translate academic insights into practical investment solutions effectively. Their portfolio construction and trading approach aims to capture factor premiums while managing costs and minimizing the drawbacks of rigid rule-based methods.

Top 3 Reasons Not to Invest

1. Factor premiums are not guaranteed: While the size, value, and profitability factors targeted by DFAU have shown long-term returns historically, these trends may not persist. Changes in market dynamics or increased investor focus on these factors could reduce the premiums. For instance, leading up to DFAU's launch, the value factor underperformed compared to growth for an extended period.

2. Potential for Tracking Error Relative to Popular Benchmark: Investors comparing performance to benchmarks like the S&P 500 should note that DFAU's factor tilts may lead to performance differences. It's important to be prepared for this divergence, as DFAU focuses on long-term capital appreciation rather than index tracking.

3. Not Ideal for Tactical or Thematic Investors: DFAU is not ideal for tactical or thematic investors due to its broad market approach and moderate factor tilts, which don’t provide focused exposure to specific sectors. Additionally, its moderate dividend yield may be insufficient for those seeking income, requiring complementary income-producing investments.

⚙️DFAU: The Core Engine of Your Portfolio

DFAU combines elements of passive index funds and active management for U.S. equity investing. It maintains broad market exposure while focusing on factors linked to higher expected returns, offering a balanced solution for long-term investors. For those looking for a research-driven approach to enhance returns without sacrificing diversification, DFAU is a strong option backed by a respected expert in factor investing.

We invite you to continue the discussion about DFAU and factor investing in the ETF UNO community. There, we will share insights, ask questions, and learn from fellow investors pursuing their financial goals through ETF investing.

DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.