April 20, 2023

Why not just buy an ETF?

Investors have become increasingly aware of the evidence against active investment management, such as stock picking and market timing. Justifiably, they are moving their dollars away from high-cost mutual funds and towards low-cost index funds. This article explores how basic ETFs are constructed and how their oversimplification can lead to missed opportunities and returns.



An index is a group of stocks that represents a market, but it’s not the entire market.

A basic index ETF does not equally weight each stock, it weights the holdings according to their size, “market value weighted”. This results in most of your money being in the big companies.

Research consistently shows that the best returns don’t come from big companies. The goal of an investor is not to buy the biggest companies but to buy companies with the greatest return potential.

  • Small companies (measured by market capitalization)
  • Cheap or value companies (measured by price to book)

There’s a long-term expectation of higher returns when investing in stocks versus bonds. Similarly, within stocks we expect higher returns from small and value companies over the long-term.

Researchers have shown that, in aggregate, small companies and value companies deliver higher returns, a finding strongly supported by historical data. Look at the increase in performance achieved by tilting towards small cap & value companies (1926-2023).

A review of the academic literature can be found here: Dimensional Equity Funds - PWL Capital

The goal of an index ETF is to track the performance of its benchmark. A singular vision of index tracking ignores opportunities to trade at lower cost, optimize tax, take advantage of momentum, and harvest securities lending revenue for clients. The goal should not be to match performance, the goal should be to maximize returns across a universe of factors.

But there is a better way to invest. The market leader in Canada is Dimensional Fund Advisors. They have a proven track record of 40+ years,  manage $800 billion, charge low fees, and employ some of the smartest minds in finance, including Nobel Laureates.

1994 – 20232:

  • $1 invested in the Dimensional World Equity Index grows to $11.65.
  • $1 invested in a basic index, represented by the MSCI All Country World Index grows to $8.26.

Camber’s team has been working with Dimensional since 2013. Importantly, Camber is not beholden to Dimensional and receives no compensation or incentives to use their products. We simply find it to be the best solution for ourselves and our clients because of their theoretical foundation, empirical backing, efficient implementation, and long-term track record of success.

The untold story of your investment portfolio.

We asked a super-computer (ChatGPT) to fact-check us.

Q: Explain the difference between a basic index ETF and Dimensional Fund Advisors?

A: Investing in Dimensional Fund Advisors (DFA) and investing in a passive ETF (Exchange-Traded Fund) are different approaches to investing with their own characteristics. Here are some key differences:

Investment Philosophy: DFA follows an evidence-based approach to investing, focusing on capturing dimensions of higher expected returns in the market. They rely on extensive academic research to construct their portfolios. On the other hand, a passive ETF aims to replicate the performance of a specific index by holding a basket of securities in the same proportions as the index.

Portfolio Construction: DFA constructs portfolios based on factors such as company size, relative price, and profitability. They emphasize broad diversification and systematic exposure to factors that have historically driven higher returns. Passive ETFs, on the other hand, aim to replicate the performance of a specific index, such as the S&P 500 or a bond index, by holding the constituent securities of that index.

Trading Approach: DFA employs a structured and disciplined trading approach, seeking to manage trading costs and minimize market impact. They utilize trading strategies designed to increase efficiency and reduce transaction costs. Passive ETFs typically have a more straightforward trading approach, seeking to replicate the index they track, often through a process called full replication or sampling.

Costs: The cost structure of investing in DFA and passive ETFs can differ. DFA funds often have expense ratios that are higher than those of many passive ETFs. However, it's important to consider the overall cost structure, including transaction costs, taxes, and any potential advisor fees when evaluating the total cost of investing.

Availability: DFA funds are typically available through financial advisors who have a relationship with DFA. On the other hand, passive ETFs are generally more accessible and can be bought and sold on stock exchanges by individual investors without the need for a financial advisor.

Customization: DFA offers some customization options, allowing advisors to tailor portfolios to clients' specific needs. They may provide different funds for specific asset classes or investor preferences. Passive ETFs, on the other hand, generally provide exposure to specific market segments or indices without customization options.

It's important to note that both DFA and passive ETFs can have a place in an investor's portfolio, depending on their goals, risk tolerance, and preferences. The choice between the two may depend on factors such as investment philosophy, cost considerations, accessibility, and the level of customization desired. It's advisable to evaluate and understand the characteristics of each approach and consider consulting with a financial advisor to determine which option aligns best with your investment objectives.

1US Small Cap Index and US Small value index sourced from Fama/French Research Index.

2 January 1988 - Present: MSCI All Country World Index (Gross Div) Total returns gross dividends in CAD Source: MSCI MSCI data MSCI 2023, all rights reserved. Performance does not reflect the expenses associated with the management of an actual portfolio. January1994 - present: Dimensional Canada World Equity. Simulated by Dimensional from Bloomberg and CRSP securities data. Total Returns in CAD. Not available for direct investment.