Ask most people how to invest for retirement, and the answer has become almost reflexive: buy a broad market index fund and hold it. It’s cheap, it’s simple, and it beats the vast majority of stock-pickers over long stretches of time. But Jake DeKinder, head of client communications at Dimensional Fund Advisors (DFA) and a CFA charterholder, argues that simply mirroring an index isn’t the same as investing well — and the distinction he draws between “active” and “passive” is more specific, and more useful, than the usual industry shorthand.
Active vs. Passive Investing: Why Dimensional Fund Advisors Calls Itself Active
DeKinder’s definition of passive is narrow and precise: either owning the entire market with no deviation at all, or buying an index fund that mechanically mimics a benchmark with no judgment applied. Anything beyond that, in his framing, is active — and by that definition, Dimensional Fund Advisors is unambiguously active, even though it doesn’t do what most people picture when they hear that word.
“We sort of joke here at Dimensional, we work way too hard to manage money to be called passive,” DeKinder said. The firm isn’t picking individual stocks it believes will beat the market, and it isn’t making predictions about where the market is headed next. Instead, it’s taking deliberate, research-grounded deviations from a plain index — a more nuanced middle ground between traditional stock-picking and pure index replication.
The core insight is that an index itself was never designed to be an investment strategy. “Indexing was designed to benchmark stock-picking managers,” DeKinder explained, tracing the practice back to the 1970s, when Dimensional Fund Advisors’ own founders, David Booth and Rex Sinquefield, were present at the creation of some of the earliest index funds. An index answers the question of what a given slice of the market returned. It was never built to answer whether that slice was the best place to put money in the first place.
Factor Investing: What “Tilting” Toward Small, Value, and Profitability Actually Means
DFA’s active deviations center on three well-documented factors: company size (small versus large), valuation (value versus growth), and profitability. Decades of academic research — the same body of work behind the Fama-French three-factor model — has found that small, cheaply-valued, and highly profitable companies have historically delivered higher expected returns than the broad market over long periods, even though there’s no guarantee any of them will outperform in a given year.
DeKinder’s own analogy for how this works in practice is a grocery store metaphor: “If I say I need vitamin C into my body, I don’t really care whether I get vitamin C from a lemon or from a grapefruit or from an orange.” An index fund is locked into buying a specific, predetermined set of securities in specific weights, whatever the price. A flexible approach can substitute among securities that deliver similar factor exposure, buying whichever ones are attractively priced on a given day rather than being forced into a rigid schedule.
That flexibility isn’t a minor implementation detail — it’s central to DeKinder’s argument for why index funds quietly give away money through trading costs. An index fund must buy specific quantities of specific stocks at specific times, regardless of price, because its entire mandate is to mirror the index as closely as possible. “If you go and you demand something from the market in some form when you trade, you will give away money through trading costs,” DeKinder said. A more flexible implementation can wait out a stock’s momentum, use tax-loss opportunities, and avoid forcing trades into an unfavorable market — all without deviating from the underlying strategy.
Core Funds: Reducing the Cost of Moving Between Small and Large
One specific structural choice Dimensional Fund Advisors has made is worth understanding on its own: rather than running entirely separate small-cap and large-cap funds, DFA’s core funds hold both inside a single vehicle. As stocks grow from small-cap into large-cap territory (or shrink the other way), a two-fund structure has to sell out of one fund and buy into the other, generating transaction costs and potential tax events. A single core fund lets that movement happen internally, reducing turnover both inside the fund and at the portfolio-rebalancing level.
This doesn’t mean the fund quietly abandons its factor tilts. DFA’s core funds still actively rotate toward smaller, cheaper, and more profitable companies — the same research-driven exposures as its standalone factor funds — just with fewer of the frictions that come from managing size exposure across multiple separate vehicles. For an advisor combining several funds into a client portfolio, that can mean a meaningfully more tax- and cost-efficient way to hold the same underlying exposures.
Why Factor Premiums Can Disappear for Years — and Why That’s the Point
The hardest part of factor investing isn’t understanding it — it’s living with it during a bad stretch. DeKinder pointed to a specific historical example to make the case concrete: from 1965 to 1981, a 17-year span, the S&P 500 returned 6.3% annualized while three-month Treasury bills returned 6.7% annualized. Stocks lost to what’s often called the risk-free rate for nearly two decades. Nobody seriously believes Treasury bills have a higher long-run expected return than stocks, but a long enough unlucky stretch can make it look that way in the data.
The same pattern shows up in individual factors. Small-cap stocks can underperform large-cap for a decade. Value can underperform growth for years at a time. International and emerging markets have gone through long stretches where U.S. investors questioned why they bothered holding them at all — right before those same asset classes turned around and outperformed by a wide margin. DeKinder’s point isn’t that these premiums are guaranteed to reappear on any predictable schedule; it’s that the return for bearing a factor’s risk only exists because the risk is real, including the real possibility of a long losing streak.
That’s precisely why abandoning a strategy in the middle of underperformance tends to be the costliest mistake an investor can make. Recency bias pushes people to judge a strategy by its last few years rather than its designed time horizon, and that bias gets stronger exactly when the discomfort is highest — a dangerous combination for anyone tempted to bail out of small-cap or value exposure after a rough stretch.
ETFs vs. Mutual Funds: A Distinction That Matters Less Than It Used To
For years, Dimensional Fund Advisors managed money exclusively through mutual funds, largely because its style of active implementation didn’t translate well into the ETF structure. A 2019 SEC rule change modernizing ETF regulation opened the door, and DFA now runs a substantial ETF lineup alongside its mutual funds — with expense ratios and underlying investment approaches that are nearly identical between the two vehicle types.
The tax-efficiency argument for ETFs over mutual funds still gets repeated often, but DeKinder is careful about what that argument actually means. ETFs mostly delay capital gains taxes rather than eliminating them — investors avoid some in-year capital gains distributions, but they still owe tax on the built-up gain whenever they eventually sell, barring a step-up in basis at death. What’s changed more recently is that DFA has built similar tax-efficient mechanics directly into its mutual funds too, driving distributed capital gains down to near zero for a number of its funds. The upshot: an investor choosing between a DFA ETF and mutual fund today can reasonably be indifferent, since cost, strategy, and tax treatment have converged.
A Less-Known Cost Lever: Securities Lending
One detail from the conversation rarely comes up in typical fund comparisons: securities lending. Funds like DFA’s routinely lend out shares to other market participants — often investors looking to short a stock — in exchange for collateral and a fee. That fee is a real source of additional return, and DeKinder was direct about how DFA handles it: rather than keeping any of that revenue as the fund manager, DFA puts all of it back into the fund for the benefit of the investors who own it.
Depending on which corner of the market a fund operates in, that can add up to a meaningful, if largely invisible, return enhancement over time — small-cap and emerging markets tend to generate more lending revenue than large-cap blue chips. It’s a reminder that the difference between fund providers isn’t only about expense ratios and factor tilts — it’s also about what happens with revenue the fund generates behind the scenes.
Dividends, Taxes, and Who Controls the Timing
DeKinder’s approach to dividends follows the same total-return logic as everything else in the conversation. Dimensional’s funds do track qualified dividend income closely, favoring dividends taxed at the lower qualified rate over ordinary income rates, but the firm intentionally doesn’t tilt toward high-dividend-paying stocks as a strategy in itself. His reasoning: when a company pays a dividend, its share price mechanically drops by roughly that amount — meaning a dividend isn’t free cash flow so much as money moved from one pocket to another. Building a portfolio that leans into dividend payers also risks concentrating into whichever sectors happen to pay dividends, which is its own form of unintended risk.
The alternative DeKinder favors is a total-return approach, where a planner sells specific holdings on a deliberate schedule to generate the cash flow a retiree actually needs, rather than letting a company’s own dividend calendar dictate when and how much taxable income shows up. That also reduces “cash drag” — the return lost by holding idle cash inside a fund to cover distributions — which matters even for money sitting inside a tax-advantaged account like an IRA, since cash’s expected return is meaningfully lower than equities’ regardless of the account type.
The International Example: Why Staying the Course Is Harder Than It Sounds
DeKinder’s clearest illustration of recency bias in action was international and emerging-market stocks. For years, clients asked why they held any international exposure at all, frustrated by a long stretch of U.S. outperformance. Then, more recently, international and emerging markets went on a run that reminded everyone why diversification across regions — not just across factors — is part of the same discipline. The lesson generalizes: nobody can predict exactly when an out-of-favor asset class or factor will turn, only that abandoning it after years of underperformance is usually the worst-timed decision an investor can make, since the recovery tends to arrive in short, sharp bursts that are easy to miss from the sidelines.
What This Means for Someone Approaching or In Retirement
Retiring doesn’t end an investor’s time horizon — it just changes what the money needs to do. DeKinder pushes back on the instinct to treat retirement as a hard line that demands a dramatically different portfolio overnight. A 65-year-old retiree can easily have a 30-year investment horizon ahead, and anyone hoping to pass assets to the next generation is effectively investing on a 40- to 60-year timeline, not a 5- or 10-year one.
That longer horizon is also why meaningful equity exposure still matters well into retirement, not just during the accumulation years. Stocks have historically outpaced inflation over long periods in a way cash and short-term bonds typically can’t, which is a real consideration for retirees who need their portfolio’s purchasing power to hold up over two or three additional decades.
The deeper thread running through DeKinder’s entire philosophy is a preference for cash flow over income framing. Rather than structuring a portfolio around when dividends happen to be paid out, DFA’s approach favors selling specific assets on a planner’s own schedule — which keeps the timing and tax control in the retiree’s hands instead of leaving it dictated by whatever a company’s dividend calendar happens to produce. For a retiree building a retirement income plan, that distinction between chasing income and managing total-return cash flow is often more consequential than which specific fund family is doing the investing.
The Bottom Line
“That was before, and this is now” is an argument DeKinder hears in every market environment, and his answer is consistent: markets have always felt unprecedented to the people living through them, and that alone has never been a reason to abandon diversification, cost discipline, or tax-aware planning. The question worth asking isn’t whether a plain index fund is enough — it’s whether the specific research-backed deviations DFA and similar firms make actually improve the odds of a comfortable retirement, and whether an investor is prepared to stay the course through the years when those deviations don’t pay off.
