Non-US Core Comparison
I’ll now look at developed international markets.
During this period, the monthly global ex-U.S. size and value premiums were 0.04% and 0.11%, respectively. This helps explain DFIEX’s higher returns. The outperformance in international markets (0.9 percentage points) was greater than the underperformance in the U.S. market (0.3%age points).
Next, I’ll look at emerging markets.
During this period, the Dimensional Emerging Markets Value Index provided a return 0.7 percentage points higher than its Emerging Markets Index, and the Dimensional Emerging Markets Small Index provided a return 1 percentage point higher—helping to explain the higher return of DFCEX.
In November 2012, Dimensional introduced its World ex-U.S. targeted value fund, DWUSX, which has more exposure to the size and value factors than DFIEX. It also combines developed international and emerging markets into one fund. The first full month we have data for it is December 2012.
During this period, the monthly global ex-U.S. size and value premiums were 0.22% and 0.05%, respectively. In emerging markets, Dimensional’s Emerging Markets Value Index produced a return 1 percentage point lower than its Emerging Markets Index, but the Dimensional Emerging Markets Small Index produced a return 1 percentage point higher.
The premiums in developed international markets help explain the higher return to DWUSX (about 80% of its holdings are in the developed markets).
I have one more core fund to examine. In April 2013, Dimensional introduced its World ex-U.S. Core Equity Fund (DFWIX). The first full month of data we have for it is May 2013. Like DWUSX, about 80% of its holdings are in developed markets.
During this period, the monthly global ex-U.S. size and value premiums were 0.21% and 0.00%, respectively. In emerging markets, the Dimensional Emerging Markets Value Index underperformed the Dimensional Emerging Markets Index by 1.2 percentage points, while its Emerging Markets Small Index outperformed by 0.2 percentage points. The size premium in developed markets helps explain the outperformance of DFWIX.
The bottom line is that factor-based portfolios do not have to be complex. They can be just as simple in terms of number of funds as total market portfolios are—or at least almost as simple. There is no need to own a dozen or more funds, as some advisors might recommend. That not only overly complicates the portfolio, it’s also less efficient than using core (multi-asset/multifactor) funds, especially for taxable investors.
For investors interested in learning why you should expect the size and value factors (as well as the momentum and profitability/quality factors) to provide premiums in the future, I refer you to my book, “Your Complete Guide to Factor-Based Investing.”
Disclosure: The funds discussed in this article have been selected for informational purposes to illustrate the data and are not provided as a specific recommendation to purchase a particular security. Past performance is historical and does not guarantee future results.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.