DFUS: Lowest Cost Russell 3000 Indexed ETF Gets Buy Rating (NYSEARCA:DFUS)

Introduction

When looking at ETFs that invest based on an index, fees are critical when deciding which ETF to own. I was familiar with two popular ones, the iShares Russell 3000 ETF (IWV) and the Vanguard Russell 3000 ETF (VTHR), but I recently found the Dimensional U.S. Equity ETF (NYSEARCA:DFUS), whose fees are below those of the more well-known managers. While fees affect results, index rebalancing trades also drives results, even more so potentially if done poorly. Along with reviewing the DFUS ETF, I compare the returns of all three ETFs. For investor looking for one ETF to cover the entire US equity market, DFUS gets a Buy rating above its competitors.

Dimensional U.S. Equity ETF review

The above chart shows results from when DFUS was a mutual fund and now as an ETF. Seeking Alpha describes this ETF as:

The investment seeks to achieve long-term capital appreciation while minimizing federal income taxes on returns. As a non-fundamental policy, under normal circumstances, the fund will invest at least 80% of its net assets in securities of U.S. companies. The fund may purchase or sell futures contracts and options on futures contracts for U.S. equity securities and indices, to increase or decrease equity market exposure based on actual or expected cash inflows to or outflows from the Portfolio. Benchmark: Russell 3000 TR USD.

Source: seekingalpha.com DFUS

DFUS has $8.8b in AUM, a very impressive size. Fees are the lowest of the three ETFs mentioned here, at just 9bps. Yield seekers need to look elsewhere as the TTM yield is just 1.2%.

Index review

FTSE Russell provides this description of their index:

The Russell 3000® Index measures the performance of the largest 3,000 US companies representing approximately 96% of the investable US equity market, as of the most recent reconstitution. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are included.

Source: research.ftserussell.com

Holdings review

DFUS invests in the entire US equity market, even so its sector allocation doesn’t differ much from what investors get when owning the SPDR S&P 500 ETF (SPY) as the next chart shows.

DFUS hold almost no Real Estate sector stocks, and does come with some “overweighting” in Industrials compared to SPY.

Even with over 2540 stocks held, the Top 20 account for 38% of the total weight.

Counting from the bottom, its takes the smallest, 2450 stocks to account for the same weight impact on the portfolio. Almost 1400 positions are listed with a weight below 0.0% and amount to just 2% of the total weight. Even a 10-bagger there would have little impact on DFUS’s CAGR!

Distributions review

I could not find pre-ETF dividend data. The current 1.2% yield says investors do not own this ETF for the income generated. Both factors contribute to a C- grade from Seeking Alpha for this factor. Overall, it rates much better.

Comparing ETFs

Since all three (DFUS, IWV, VTHR) invest based on the same index, the next results would be expected. I included SPY to see how much the total-market strategy moves allocations.

Adding non-large-cap stocks only moved about 8% of the allocation downward. The Growth/Value split was little effected. When looking at the P/B or P/E ratios, the expanded universe again had little effect. The next chart is what counts, historical results. Unfortunately, my data source only has data from when DFUS converted to an ETF for this chart.

Since July’21, DFUS has beaten the other two R3000-based ETFs, though adding smaller stocks has it lagging behind SPY. The same results show up when comparing risk ratios. Using return data DFUS provides, we see the same ranking back 10 years: SPY on top but only 30bps annually better than DFUS, which again beat IWV and VTHR.

I mentioned above that index rebalancing efficiency will affect returns. One measure of that is an ETF’s turnover ratio, though other factors are in play too. Here, DFUS reports a 2% turnover rate: IWV 4%, and VTHR 11%. Keep in mind, the R3000 only changes components yearly.

For investor looking for one ETF to cover the entire US equity market, DFUS gets a Buy rating above its competitors.

Portfolio strategy

My regular readers would be familiar with the concept of “Core” versus “Non-Core” ETFs, for others here is how a define both:

Core ETF: An ETF based on an index without special factors (like Value, momentum) that is passively managed and is a Buy/Hold ETF as a base building ETF.

Non-Core ETF: Either Index based with factor selection rules, dynamically managed, or non-indexed and actively managed. While these could also be Buy/Hold, trading might be their best strategy. Regardless, their sole purpose is to add Alpha by outperforming the equivalent Core ETF.

Based on that, I classify the DFUS ETF as a Core ETF designed to cover the complete US equity market in the simplest way possible. For those who want some control over their market-cap allocation within the US equity market, owning three (or four if wanting micro-cap stock exposure) is an acceptable Core strategy. If going that route, stick with the same ETF manager otherwise you might can some unexpected overlap or gaps between the different market-caps.

Final thoughts

With US stocks selling at a P/E ratio only topped in 2021 over the past decade, one could argue they are, at least, not undervalued. The Morningstar Price/Fair Value ratio currently stands at 1.02, up from .8 last fall. A value of 1.0 equates to fairly valued.

That said, since I treat an ETF like DFUS as a long-term Core holding, my Buy rating would be independent of the market valuation unless the market was extremely overvalued, and I was confident that a better buying opportunity could appear. I would not be a seller unless my equity/bond ratio was needing adjusting.