Insights from Dimensional’s Portfolio Consulting Group: Q1 2026 Market Themes

Each year, Dimensional’s Portfolio Consulting Group engages with hundreds of wealth advisors and institutions to help these financial professionals assess their portfolios and to offer potential solutions to enhance their asset allocations. Consultations are tailored to specific client requests, but themes frequently emerge. In this article, we highlight a few notable topics from recent portfolio consultations that can serve as a good reminder to check up on your investment portfolio to help ensure it’s well aligned with your goals and objectives.

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A common issue when evaluating client international equity allocations is geographic style drift. Investors are sometimes surprised to learn that some actively managed international funds hold US-domiciled and US-listed companies. Managers may justify this approach by including in their definition of “international” firms that generate a certain portion of their revenues abroad.

Geographic style drift can contribute to performance differences relative to dedicated international benchmarks. The strong returns of non-US markets in 2025 brought this issue into sharper focus for many investors. Last year, the MSCI World ex USA IMI Index and the MSCI Emerging Markets IMI Index each returned over 30% compared to 17% for the Russell 3000 Index. Some “international” funds may not have been well positioned to fully capture the returns available outside the US. Taking a longer view, our research suggests that holding international securities can help investors potentially capture the benefits of global diversification, particularly when those markets outperform.¹

We can look at funds classified as “Diversified Emerging Markets” by Morningstar to see examples of this geographic inconsistency. In Exhibit 1, we show regional exposures for three active funds in this category that we’ve encountered in client conversations over the past year, which we selected for illustrative purposes given we see varying levels of exposure to US, developed market, and emerging market countries across funds in this category. We compare them to the regional exposures of the Dimensional Emerging Core Equity Market ETF (DFAE), which is Dimensional’s oldest emerging markets ETF. While we see some funds in the Morningstar category with no exposure to the US and other developed markets, similar to DFAE, each of the three non-Dimensional examples has allocations to the US and other developed markets. In fact, US-listed companies rank among the Top 10 positions of each fund. These include mega cap, widely held names, such as NVIDIA, Microsoft, Alphabet, and Visa. For investors who also hold these stocks within their dedicated US equity allocations, a related concern may be unintended overlap and a higher level of concentration in the same companies—potentially undermining the diversification they expect from their emerging markets exposure.

For the period from January 1, 2021, through December 31, 2025, the annualized tracking error of these funds ranged from nearly 7% to more than 14%. Such wide tracking error suggests that the exposures investors are receiving may not be well aligned with the emerging markets asset class they intend to capture.

Understanding what is inside an international or emerging markets fund is important in assessing whether it fits with the role the allocation is meant to play in the overall portfolio. Careful due diligence of the underlying countries and holdings can help investors confirm they are receiving the regional exposure they expect—and help avoid unintended overlap across their broader equity portfolio.

Upon request, Dimensional's Portfolio Consulting Group will gladly provide further comparative analysis for any fund in the Diversified Emerging Markets Morningstar category not shown in the previous analysis.

Across hundreds of portfolio consulting meetings in the past year, a common theme was that investors were underweight or even completely missing non-US bonds in their fixed income allocations. Bonds issued in countries and currencies outside the United States represent a meaningful opportunity set, making up approximately 60% of the global bond universe, so it is worthwhile for investors to examine if global bonds can play an additive role in their asset allocations.

Exhibit 2 illustrates how global diversification might improve the portfolio risk and return characteristics of a fixed income allocation. The chart shows returns and standard deviations over the past 25 years for two US fixed income benchmarks compared to corresponding global benchmarks with similar average durations. In each case, the global benchmarks offered lower standard deviations while producing higher annualized returns. These results are in some ways intuitive. Interest rates around the world do not move in lockstep; investing globally offers diversification, and investing in multiple yield curves naturally expands the opportunity set for pursuing higher expected returns.

How managers approach investing in global bond markets matters too. Expanding beyond the home market can add complexity, requiring expertise to navigate. Dimensional has managed global bond portfolios for decades, using a systematic transparent approach that emphasizes sound research and flexible portfolio management and trading. By contrast, active bond-picking approaches tend to charge higher fees and rely on getting forecasts right, while traditional indexing approaches often sacrifice flexibility for minimizing tracking error.

Concentration has been on the rise in the US market over the past decade. At the end of last year, the Top 10 stocks in the S&P 500 represented over 40% of the benchmark, compared to roughly 20% 10 years ago, and the Top 20 stocks represented close to 50%.

This increased concentration has been in part driven by the growing size of a group of mega cap companies commonly known as the Magnificent 7. Along with higher concentration, another common topic in many of our investor conversations is rising valuations in the US, particularly in the largest stocks. As an illustration, Exhibit 3 shows the valuations as of December 31, 2025, of the Magnificent 7 and several widely followed benchmarks compared to the US market 30-year average.

These developments have led many investors to evaluate their level of comfort with the concentration in the holdings of their large cap active fund or index fund manager. Dimensional’s core lineup illustrates how a focus on areas of the market with higher expected returns can help investors reduce concentration while maintaining broad market exposure.

Exhibit 4 compares the weight of the largest stocks in the S&P 500 to that in three Dimensional core equity ETFs. All three Dimensional ETFs are designed to offer broad equity market exposure while emphasizing smaller stocks with lower relative prices and higher profitability. The Dimensional US Core Equity Market ETF (DFAU) and the Dimensional US Core Equity 2 ETF (DFAC) both invest in the US market, with DFAC offering relatively sharper tilts to stocks with higher expected returns. The Dimensional World Equity ETF (DFAW) covers global markets, providing a nice illustration of how global diversification can be helpful in reducing concentration in the largest stocks.

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Fama/French Total US Market Research Index: July 1926–present: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Ken French website.

Past performance is no guarantee of future results. Actual returns may be lower. The Fama/French indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.

Results shown during periods prior to each index’s inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.