Why Microcap Stocks Could Outperform in a Top-Heavy Market

Joel Schneider, he is deputy head of portfolio management at Dimensional Fund Advisors.

Really nice to have you.

Thanks for being here.

Pleasure to be here.

Thanks.

So I think to properly give the context of what you're all here to celebrate, we need to go back a few decades.

1981, your first mutual fund.

It was a US microcap portfolio.

That's all the way back in 1981, and now you've released a dimensional US microcap ETF.

It's a.

Share class of that original product.

Why now?

That's right.

So there's two really important things about DFMC, which is the ETF share class of that microcap portfolio.

The first is that it is literally the industry's first active ETF.

That's a share class of a mutual fund, and we think there's a lot of benefits of that share class structure for the end investor.

The second thing that people should know is important is that right now with the market being so top heavy, DFMC gives people the opportunity to get diversification in the US equity market and in doing that they don't necessarily have to give up great performance.

If you look at the track record of DFMC.

It goes back over 4 decades and it has crushed the small cap benchmark.

And so in pursuing that additional diversification that people want, they can still get great performance too.

And is that kind of part of the overall thesis, which is, hey, look at these mega caps, look at these top heavy names.

The S&P 500 is disproportionately consolidated around a lot of those big names, and there are some other parts of the market that are worth paying attention to.

Yes, absolutely.

So the origin story of this fund is really important right now because.

We launched this for institutional investors, and the problem that those institutional investors had was that they were overconcentrated in US large cap stocks.

Interestingly, that was 45 years ago.

And so in many ways, history repeats itself.

And so now for investors who are concerned about that concentration, they're thinking about how do I diversify, but in a way where I still get good performance.

And this portfolio has a 45 year track record, beaten the benchmark by 150 basis points.

Year, so I think right now is great timing for this strategy.

And when we talk micro cap, we're talking micro that a market cap somewhere between 50 million and $300 million.

Is that more or less the range for a lot of these companies you target?

So, so we're talking about the bottom half of small cap.

So we call small cap the bottom 10% of the market.

And if you look out there, there's a bunch of different small cap indexes.

They use all sorts of different definitions of small.

So there really isn't one definition.

A lot of those indices have really big performance differences against each other and so what we do here is we target the bottom 5% of companies in the US market and get rid of a lot of the underperforming ones.

So that's what drives the outperformance of this relative to other small cap funds.

For a lot of investors who aren't familiar with micros, this activity more or less follow the same pattern we have in the broader.

S&P 500.

In other words, tech and discretionary tend to be much bigger than utilities and real estate.

Do the same sorts of assortment there for stocks work for microcap as well, or is the consideration a bit different?

Yes, so the makeup of the microcap space is different from the large cap space, which is a good thing.

This gives you additional diversification.

So in a year like this year where you've seen the S&P isn't up the way that it has been, actually this portfolio has been up 9% versus the S&P 500 this year, and it's because you're accessing different sectors, different industries, and different companies.

That's awesome, really exciting project.

Uh, Joel Schneider, deputy head of portfolio management at Dimensional, thanks a lot for being here.

Congrats on the new launch.

Nice to have you.

Yeah, we're excited about it.

Thanks for having us.