Featuring Joel Schneider Deputy Head of Portfolio Management, North America


Index funds are often viewed as low-cost, passive investments designed to avoid subjective decisions and to simply deliver the returns of an asset class. However, the providers who manage the benchmarks that are tracked by index funds must make a number of active decisions, and these decisions can have a notable impact on index funds' returns.

In this five-part video series, we take a closer look at some of index investing's inefficiencies. Joel Schneider, Deputy Head of Portfolio Management for North America, examines the implications of how indexes are constructed and managed—and explores what Dimensional believes is a better way to invest.

  •     Video 1: Active Decisions Can Impact Returns
  •     Video 2: Who Writes the Rules for Indexes?
  •     Video 3: Is the S&P 500 Index Passive?
  •     Video 4: Is Indexing Aligned with Your Goals?
  •     Video 5: Index Investing Is Good, Not Great

 

Active Decisions Can Impact Returns

Index providers regularly make active investment decisions in the design and rebalancing of their indexes. These decisions may lead to significant differences in performance among the funds that track these indexes.

(Length: 1:34)

 

Who Writes the Rules for Indexes?

Index rules about what assets to include and how to weight them can result in inconsistent coverage among indexes—which can affect investors' returns.

(Length: 2:09)


Is the S&P 500 Index Passive?

The S&P 500 is one of many indexes that engage in active stock selection, which can have an impact on index-fund investors' returns. Tesla provides an instructive example.

(Length: 2:38)


Is Indexing Aligned with Your Goals?

The goal of index funds is to minimize tracking error with the indexes they follow. But the companies that build indexes are generally not fiduciaries, so they are not prioritizing what's best for investors. That misalignment can have costs.

(Length: 2:49)


Index Investing Is Good, Not Great

We believe you can keep the good parts of indexing, like broad diversification and low fees, and improve on the bad parts with rules-based strategies that have a track record of beating benchmarks.

(Length: 3:09)

This article originally was posted on March 21, 2025. It is republished here with permission of Dimensional Fund Advisors LP. No further republication or redistribution is permitted without the consent of Dimensional Fund Advisors LP.



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Index Fund Advisors, Inc. (IFA) is a fee-only advisory and wealth management firm that provides risk-appropriate, returns-optimized, globally-diversified and tax-managed investment strategies with a fiduciary standard of care.

Founded in 1999, IFA is a Registered Investment Adviser with the U.S. Securities and Exchange Commission that provides investment advice to individuals, trusts, corporations, non-profits, and public and private institutions. Based in Irvine, California, IFA manages individual and institutional accounts, including IRA, 401(k), 403(b), profit sharing, pensions, endowments and all other investment accounts. IFA also facilitates IRA rollovers from 401(k)s and 403(b)s.

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SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

About the Author

Dimensional Fund Advisors

Dimensional Fund Advisors

Dimensional is a global investment manager dedicated to implementing the great ideas in finance. Founded in 1981, Dimensional Fund Advisors has a long history of applying academic research to practical investing. Headquartered in Austin, Texas, Dimensional Fund Advisors has offices internationally in Canada, Australia, Japan, and Hong Kong.

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