Index Reconstitution - The Price of Tracking

As you know, we recommend Dimensional Fund Advisors (DFA) mutual funds to our clients for their investment portfolios.  While DFA funds are not actively managed, they aren't index funds either.

Index funds are passively managed mutual funds designed to specifically track a particular index (such as the S&P 500, the Russell 2000, and many, many others).  In fact, a general measure of success for an index fund is just how closely it tracks to its underlying index.  However, there can be a cost to investors in connection with index funds' adherence to their objective of tracking an underlying index. 

Here's an article from DFA discussing this cost that we thought you might find interesting. (See attached PDF file for this article.)  

This is another reason why we agree with DFA's investment philosophy of not slavishly following an index and taking the available evidence and research into account when engineering its mutual fund portfolios.  

If you have any questions about this topic or anything else with your planning, please let us know.  Thank you, and we hope you're enjoying the start of the Summer!