A Glance at Trading Costs in Dimensional SMAs

We often think of customized service as expensive. I expect a ready-made, one-size-fits-all meal from the grocery store to be cheaper than having a chef come to my home and cook something for me, just the way I like it. But do I have to pay extra to get a personalized experience?

When it comes to trading in Dimensional separately managed accounts (SMAs), the answer is no. In SMAs, buy and sell orders are routed to each account’s custodian for execution. Even though Dimensional does not execute these trades, we thoughtfully design portfolios and structure order generation to help limit costs.

Since trading costs may have a meaningful impact on net returns to investors, Dimensional regularly monitors SMA trading costs using a proprietary trading cost analysis (TCA) process.

Exhibit 1 presents the trading costs of Dimensional SMAs in 2022 through 2023, as measured by percent of spread captured. This metric reflects the portion of the bid-ask spread—the amount by which the ask price exceeds the bid price—that a trade managed to avoid paying. The higher the spread capture, the lower the execution cost. For example, if spread capture is 0%, the trade crossed the full spread, meaning there was no discount; if the spread capture is 100% for a buy, the trade was executed at the bid price (or for a sell, the trade was executed at the ask price). For each individual year, 2022 and 2023, trading costs were similar.

On average, both buys and sells in Dimensional SMAs are executed near the midpoint. The relatively low trading costs of Dimensional SMAs are yet another example of how an integrated, flexible implementation process can benefit SMA investors. We design strategies to exclude the least liquid names and have low turnover, we spread this turnover across many names, and we consider expected trading costs and expected liquidity in daily order generation. As a result, portfolio managers can limit the sending of orders with high expected trading costs to custodians, which may contribute to the price improvement achieved by the custodians.

Dimensional SMAs use a rigorous, thoughtful process to deliver personalized investment solutions without sacrificing low trading costs. Now if only there was a chef who would create that special meal just for me without breaking the bank!