Factor Industry Resembles the Market
Factor investing has grown rapidly, but evidence suggests it hasn’t erased expected return premiums. The average factor fund still looks surprisingly market-lik
s factor-based investing grows, how might this impact the premiums these strategies pursue? If factor-based investors increase the overall demand for small cap and value stocks, the expected premium for these stocks could become lower. However, there are many different types of factor-based portfolios that may result in targeting different areas of the market and exerting negligible net effect on expected return premiums.
Plotting characteristics for the Morningstar strategic beta category gives us some insight on which story plays out. This category includes more than 560 funds, managing collectively about $3 trillion and tracking indices that deviate from the market based on specific objectives, such as increasing return or managing risk. Aggregating their characteristics tells us the style of the average dollar invested in the group. And that style is more market-like than some might expect: Compared to the Russell 3000 Index, these funds skew slightly smaller and growthier, but with very similar profitability. Based on this sample, at least, there’s not much evidence factor investors are attenuating premiums associated with higher expected return stocks.
EXHIBIT 1
Strategic Beta Category Characteristics as of June 30, 2026
.webp)
Glossary
Premium: The return difference between two assets or portfolios.
Price-to-book ratio: The ratio of a firm’s market value to its book value.
Profitability: A company’s operating income before depreciation and amortization minus interest expense scaled by book equity.
Size premium: The return difference between small capitalization stocks and large capitalization stocks.
Value premium: The return difference between low relative price stocks and high relative price stocks.
Disclosures
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
CANADA
These materials have been prepared by Dimensional Fund Advisors Canada ULC. The other Dimensional entities referenced herein are not registered resident investment fund managers or portfolio managers in Canada.
This material is not intended for Quebec residents.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns, including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
Resources
