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Hello, ETF UNO readers! Welcome to another edition of our newsletter, where we bring you the latest insights and information about ETF investing. In today's newsletter, we're delving into small-cap investing, focusing on the DFAS ETF.
We will learn how investing in small-cap stocks differs from large-cap equities, the conditions under which small-cap stocks perform better, and why DFAS could be a valuable addition to your investment portfolio. We'll also look at Dimensional, the ETF's provider, and examine the historical performance of DFAS. By the end of this article, you will have comprehensively understood whether DFAS is a suitable investment for you.
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What is DFAS?
The Dimensional US Small Cap ETF, ticker symbol DFAS, is brought to you by Dimensional Fund Advisors. This ETF focuses on small-cap US equities, offering investors exposure to a segment of the market that often flies under the radar but can provide significant growth potential.
Small-Cap 🆚Large-Cap: Understanding the Difference
To fully grasp DFAS's focus on small-cap investing, let's explore how investing in small-cap equities differs from their large-cap counterparts:
Company Size 🏢: Small-cap companies have a market capitalisation typically between $300 million and $2 billion, while large-cap companies boast market caps of $10 billion or more.
Growth Potential 🚀: Small-cap companies often stand out for their significant growth potential. They are usually in earlier stages of development or operating in niche markets with substantial expansion opportunities, making them an attractive investment option.
Volatility 🌪️: Small-cap stocks are known for their higher volatility than large-cap stocks, which can lead to more significant price swings, both up and down, presenting both risks and potential rewards for investors.
Liquidity 💧: Large-cap stocks are generally more liquid, making them easier to buy and sell without affecting the stock price. Small-cap stocks may have lower trading volumes, which can impact liquidity.
Analyst Coverage 🔍: Wall Street analysts often extensively cover large-cap companies, while small-cap companies may fly under the radar. This overlooked segment can create opportunities for investors who do their homework.
Optimal Market Conditions for Small-Cap Success 🌟
Small-cap stocks often perform better under certain market conditions:
Economic Recovery: During periods of economic recovery, small-cap equities tend to outperform. As the economy improves, these companies often have more room for growth and can adapt quickly to changing conditions.
Rising Interest Rates: Surprisingly, small-caps have historically performed well when interest rates are rising. An explanation is that they tend to rely less on debt financing than larger companies.
Domestic Focus: Many small-cap companies focus on the domestic market. When the local economy is strong, these companies can benefit more than multinational large-caps.
Market Rotation: When investors sense that large-caps are overvalued (as of 2024, the top few tech giants represent a significant portion of the S&P 500's market cap), they often rotate into small-caps, sparking a price surge. This potential for outperformance can be an exciting prospect for investors.
By investing in small-cap ETFs such as DFAS, you can diversify away from this concentration risk and capture growth in other sectors and emerging companies.
Dimensional: A Trusted Yet Overlooked Provider 🔒
Although it might not be a household name like Vanguard or BlackRock, it's a company worth knowing. Founded in 1981, Dimensional has been at the forefront of applying its rigorous academic approach to investing and its focus on evidence-based strategies. You can also read more details in our previous article about the other ETF DFAT offered by Dimensional.
Dimensional Fund Advisors (DFA) is a global firm specialising in factor investing.
DFAS at a glance
ETF Issuer: Dimensional Fund Advisors (DFA)
Inception: 15/12/1998 (converted into ETF in 2021)
Asset Class: Equity
Underlying Index: DFAS is an ETF actively manged by DFA
Geographical Focus: U.S.
Expense Ratio: 0.26% (as of last data point)
Dividend Yield: 0.94% (as of last data point)
Distribution Frequency: Quarterly
Historical Performance
Before becoming an ETF in 2021, DFAS operated as a mutual fund for over twenty years. This long track record demonstrates the viability of DFAS’ evidence-based methodology, which has consistently delivered solid results for investors.
ETF Radar View
The radar chart below shows the general characteristics of the ETF:
DFAS on the Radar
For each domain, higher scores indicate better suitability for investment
Top 3 Reasons to Invest
Growth Potential: Small-cap stocks have historically shown potential for significant growth, and DFAS provides targeted exposure to this dynamic market segment.
Factor Exposure: DFAS uses Dimensional's factor-based approach to enhance returns by focusing on companies with favourable characteristics.
Professional Management at a Cost-Effective Rate: With DFAS, you benefit from Dimensional's expertise in small-cap investing and factor-based strategies at a cost-effective expense ratio of 0.28%, ensuring high returns at a reasonable cost.
Top 3 Reasons Not to Invest
Higher Volatility: Small-cap stocks can be more volatile than large-cap. If you're risk-averse or nearing retirement, the potential for more significant price swings might not align with your investment goals.
Potential for Underperformance: Small-caps don't consistently outperform. There have been relatively long periods where large caps have delivered superior returns. If you believe we're entering such a period, you might prefer to focus on large-cap funds.
Higher Expense Ratio Than Some Competitors: It's worth noting that while DFAS's 0.26% expense ratio is reasonable, it's higher than some passive small-cap ETFs. If cost is your primary concern, you might find cheaper alternatives without Dimensional's factor-based approach.
📈 Small-Cap, Big Dreams
In conclusion, the DFAS ETF offers a unique opportunity to invest in small-cap US equities with the backing of rigorous academic research. While small-cap stocks can provide substantial growth potential and portfolio diversification, they also come with increased volatility and economic sensitivity. By carefully considering the benefits and risks, you can decide whether DFAS aligns with your investment goals.
We hope this deep dive into DFAS has been informative and valuable. We encourage you to stay connected with the ETF UNO community. By joining our newsletter and participating in our discussions, you'll gain access to:
Regular updates on the latest ETF trends and opportunities
In-depth analysis of various ETFs across different sectors and strategies
Expert insights to help you make informed investment decisions
A community of like-minded investors to share ideas and experiences
Investing in ETFs can be a powerful way to build long-term wealth, and we're here to help you navigate this exciting world. Keep learning, stay curious, and happy investing!
DISCLAIMER: The information in this article is for educational purposes and should not be taken as investment advice. Investors should conduct their own research or consult a financial advisor before making investment decisions.
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