The differences between retail index funds and actively managed funds are discussed below.
The article does not discuss a more broadly defined index that Dimensional (DFA) has developed. Retail indexes, as the article discusses, are defined by an investment committee such as Standard and Poor’s, Dow Jones, and others. Fund companies that follow these indexes have little choice but to transition companies in or out of their indexed funds … this is called “reconstitution” which has a “reconstitution effect” on the fund, described by Forbes in the linked article.
DFA on the other hand does not give up control of which companies fit into their funds since they target market dimensions more broadly as described here on their website.
The main reason for indexing is to better target a specific market in order to capture the dimensions of different returns that different markets provide. Skillful diversification (as opposed to simple allocation – there is a difference) also targets a risk level you may be seeking.
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In the interest of disclosure: I do use DFA sub-managed SA Funds with most clients (not a fund requirement, but a business decision I’ve made). This blog is not a solicitation; simply an explanation of the basic philosophy and approach of the funds.