Enhanced/Engineered Indexes

Enhanced or Engineered Indexing is a structured approach to index funds investing that builds on the basic principles of index fund construction with an emphasis on performance rather than market tracking. These indexes use sophisticated methodologies which are designed to select a group of securities with similar fundamental characteristics from a market group to create a portfolio that is representative of a benchmark index. Our relationship with DFA allows us to offer our clients these unique index funds. In Dimensional's view, the road to investment success lies in identifying the risks that bear compensation, choosing how much of these risks to take, and then striving to minimize the risks and costs imposed by traditional approaches. Science-based portfolio engineering makes this possible.

Dimensional designs dynamic strategies that offer focused exposure to the risk dimensions of the market in fully diversified portfolios. Unlike index funds that follow commercial benchmarks, Dimensional defines asset classes based on a security's market capitalization and book-to-market (BtM) ratio and actively applies their own eligibility rules. To gain the purest representation possible, they exclude securities that do not exhibit the general characteristics of the defined asset class. They also eliminate securities that lack sufficient liquidity for cost-effective trading.

Engineering portfolios around broadly defined risk factors regularly generates opportunities for Dimensional traders to add value. Rather than replicate an index in mechanical fashion, they permit deviations from market cap weightings and allow for the integration of stocks among asset classes. This flexibility also allows them to reduce transaction costs caused by counterproductive trading. For asset classes defined by size, a slightly higher hold or "buffer" range allows Dimensional to hold securities that commercial indexes are forced to sell, which reduces turnover and can increase returns.