To compete with behemoths like Vanguard, new ETFs must focus on boutique strategies that are too complex, differentiated, or capacity-constrained for trillion-dollar managers. Competing on broad, scalable market beta is futile; the opportunity lies in specialized areas where expertise and smaller scale are advantages.

Many factor ETFs are 'closet indexers' that only slightly tilt a benchmark. A purer, academic approach builds concentrated portfolios (e.g., top 10% on momentum), creating high active share and true differentiation. This method risks severe, prolonged deviation from benchmarks, making it suitable only for investors with very long time horizons.

David Booth's close relationship with researcher Eugene Fama allowed him to get a draft of the seminal three-factor model paper in 1991. He immediately acted on it, flying a client to Chicago to hear the research directly from Fama and launching value strategies before the academic world had seen the published work.

Despite decades of evidence, there is no agreement on why factors like "value" (cheap stocks outperforming) work. The debate is split between rational risk-based explanations (Fama's view that they are inherently riskier) and behavioral ones (Shiller's view that investors make systematic errors). This uncertainty persists at the core of quant investing.

Instead of designing funds to meet popular demand, DFA focused on leading with research and ideas they believed in. This educational approach attracted high-conviction clients who understood the philosophy, making them more likely to remain invested during periods of underperformance.

In the 1970s, two distinct investing approaches emerged from one team at Wells Fargo. One focused on simple market tracking (S&P 500), which evolved into BlackRock. The other, a scientific approach to outperform indexing via factors, became the foundation for Dimensional Fund Advisors.

The dominance of passive investing (~65% of the market) and the decline of sell-side research have created a structural inefficiency in small-cap stocks ($500M-$2B). With fewer active managers doing the work, valuations in this segment are extremely attractive, creating significant opportunities for diligent investors.

Market efficiency increases with company size and liquidity. Therefore, the excess returns (alpha) from investment factors like value are significantly larger in the inefficient micro-cap space. For large-caps, the market is so efficient that factor premiums are minimal, making low-cost indexing a superior strategy.

Durable Capital founder Henry Ellenbogen's research shows that over any 10-year period, only about 40 of 4,000 public companies compound at 20%+ annually. Critically, 80% of these “valedictorians” begin their compounding journey as small-cap stocks, highlighting this market segment's importance for long-term growth investors.