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DFAC returned 15% over the past year but matched the S&P 500 despite charging fees for factor-based tilts.
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Rising 10-year Treasury yields above 4.2% threaten DFAC’s small-cap holdings while 40% of Russell 2000 stocks remain unprofitable.
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The fund holds $40B with 16% in NVDA, MSFT and AAPL while maintaining a 0.17% expense ratio.
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The Dimensional U.S. Core Equity 2 ETF (NYSEARCA:DFAC) has delivered a 15% gain over the past year, essentially matching the S&P 500’s return. Investors paid for Dimensional’s factor-based approach and got market performance. DFAC’s 2026 performance will likely depend less on 2025 results and more on what drives 2026 returns.
DFAC manages nearly $40 billion using a strategy that tilts toward smaller companies while maintaining mega-cap tech exposure. The fund’s top three holdings are NVIDIA Corporation (NASDAQ:NVDA), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL), representing nearly 16% of assets. Information technology accounts for 26% of the portfolio. This isn’t a pure small-cap fund-it’s a core equity strategy that leans into factor premiums when available but doesn’t abandon the market’s growth engines.
Small-cap stocks live and die by interest rates, and 2026 presents a complicated picture. The Federal Reserve has delivered three rate cuts, bringing the federal funds rate to 3.5% to 3.75%. But longer-term Treasury yields have been climbing, with the 10-year hitting its highest level since September. That’s a problem for DFAC’s small-cap holdings.
Small companies often rely on floating-rate debt, so they benefit when short-term rates fall. But rising long-term yields shrink the present value of future earnings, particularly for unprofitable companies. About 40% of Russell 2000 stocks didn’t turn a profit over the past year, according to Apollo Global Management (NYSE:APO). DFAC’s factor screens help avoid the worst offenders, but the fund still holds plenty of smaller firms whose valuations depend on optimistic growth assumptions.
Watch the 10-year Treasury yield weekly. If it continues climbing above 4.2%, the small-cap tilt that defines DFAC becomes a headwind. If yields stabilize or fall as the Fed continues easing, that same tilt becomes an advantage. The CME FedWatch Tool currently shows no rate cut priced in until April 2026 at the earliest.