Flexible Trading Provides Real Cost Reductions
Who cares about how the mutual funds or ETFs in your portfolio implement their trading policies? We do! We look to partner with those who seek to capture every bit of return available on the markets. Dimensional Fund Advisors is one of those firms.
Costs in Investing Really Matter for Investor Returns
Investing in the real world incurs costs, and costs matter for the returns investors get.
Dimensional Fund Advisors use a flexible trading approach that seeks to reduce costs. This flexibility starts with their investment philosophy. They seek to add value by systematically emphasizing groups of stocks with higher expected returns rather than by identifying mispriced securities. As a result, they can consider many securities with similar characteristics as close substitutes for one another. Their flexible trading approach is also empowered by their thoughtful portfolio implementation. They structure their portfolios to focus on long-term drivers of returns—such as company size, relative price, and profitability—which do not require high turnover. Dimensional incorporates information from shorter-term drivers of returns, such as momentum and securities lending fees, by delaying buys and/or sells of securities rather than by chasing fast-dissipating signals. And they seek to rebalance their portfolios incrementally each day using up-to-date information. All of this enables Dimensional to participate daily in the available market liquidity and avoid demanding immediacy.
In a new study, they examine the trading price advantages of this flexible approach after tracking trade data over the 2017–2020 period across 46 stock markets. As shown in Exhibit 1, Dimensional’s average price advantages—measured by their trading prices relative to those obtained by market participants who demand immediacy—were pervasive across markets and persistent over time. Dimensional's price advantage was 10.5 basis points (bps)1 on average over the period, ranging from 4.3 bps for US large cap stocks to 24.8 bps for emerging markets small cap stocks. Furthermore, this longstanding flexibility can be more valuable when volatility is high. Indeed, we see that the price advantages increased as much as 100% in times of extreme return volatility, like March 2020.
EXHIBIT 1Dimensional’s Price Advantage Over SBBO2 (bps)2017–2020
These results are just one of the many positive outcomes from Dimensional's robust investment process, built on decades of implementation expertise. For over 40 years, Dimensional has employed a systematic and cost-effective approach to capture every bit of return we can for our clients, in the real world.
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1Basis Point: One basis point (bps) equals one-hundredth of a percentage point (0.01%).
2SBBO: To measure the price advantage of our flexible trading over demanding immediacy, we conduct trading cost analysis by benchmarking our trade price to the immediately executable price, which is the prevailing bid price for a sell and offer price for a buy. This benchmark is called SBBO (sell at the bid and buy at the offer).
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