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Wes Crill, Dimensional Fund Advisors

Dimensional tackles single-stock ETFs


Dimensional Fund Advisors has conducted research into single-stock ETFs, describing them as ‘yet another shiny object to distract from proven, long-term fundamentals.’

Wes Crill, Head of Investment Strategists at Dimensional Fund Advisors, reports that the research, undertaken by Dimensional, reveals that single stocks show a wide range of returns and only about a fifth of stocks survive and outperform the market over 20-year periods

DFA, which does not have any single-stock ETFs, says that during uncertain periods in the market, such as now, holding a large portion of assets in single stocks limits investors’ ability to diversify their portfolio and protect themselves from risk.

The research found that single stocks delist at a high rate, even those that have been around for a long time and have outperformed the market for 20 years, and that the chance of any single stock outperforming the market in the future is not meaningfully different when conditioning on its past performance.

The report says: “Many investors end up holding large, concentrated positions in single stocks, whether as the result of employee compensation or a handsomely rewarded stock selection. Familiarity with these stocks or a successful track record while holding them may discourage investors from diversifying. Unfortunately, this can lead to one of the most well-known cautionary tales in finance: tragic declines in wealth from losses in single securities.

“And data on the behaviour of individual stocks suggests it’s hardly rare for firms to underperform—or even go under—regardless of past performance.”
Crill comments that DFA’s legacy over 40 years is to deliver investment solutions to help their clients achieve specific goals.

“We are not stock pickers. At our core, we are trying to take the appealing aspects of broad index investing and layer in a daily, flexible implementation process rooted in academic research and the information present within market prices,” Crill says.

“The other critical element is to manage risk and to observe what is going on across markets on a daily basis, which enables us to focus on the objective of the portfolio and minimising unnecessarily high costs of trading. Trading always comes with costs, and trading on days where there isn’t enough liquidity will cost more and could push prices.”

Crill says that the audience for the firm’s research is the many investors who have large legacy holdings in a single security and may be reluctant to sell out of these long-term position for the sake of diversification.

“Another thing we wanted to show is that even stocks that have been around for decades and outperformed do not have an increased chance of continuing this outperformance or even surviving going forward.”

Crill also notes that modern economics mean that many investors don’t necessarily have access to pensions that saw previous generations comfortably through their retirements. Accordingly, they will need to manage their portfolios for retirement and avoid unnecessary risks like the position concentration and leverage often seen in investments like single-stock ETFs.

He offers a potential solution for those currently holding large single positions as well, advocating for the use of separately managed accounts (SMAs) in incorporating and repositioning from large holdings of single securities. As a result of technology advances and lower operational costs, asset managers like Dimensional are now offering SMAs with significantly lower minimums, he says. SMAs can allow for single-stock positions to be blended into more diverse holdings with an added benefit of increased tax efficiency—aiding in reducing risk without necessitating potentially costly wholesale divestments.

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