What if “just buying the market” isn’t the end of the story? In this episode, we are joined by Gerard O’Reilly, Co-CEO and Co-CIO of Dimensional Fund Advisors, for a deep dive into what really drives net investment returns. Gerard returns to the Rational Reminder podcast to explain the key principles that differentiate Dimensional’s approach from traditional indexing—and why implementation, flexibility, and detail matter so much more than investors might think. We explore the concept of hidden costs in index investing, how index reconstitution and trading frictions erode returns, and the nuanced decisions that shape a market portfolio: defining the market, excluding low-returning stocks, optimizing tax efficiency, and more. Gerard breaks down how Dimensional’s rules-based, evidence-backed process improves outcomes through smart exclusions (like IPOs and high asset-growth firms), precise trading, securities lending, and better handling of corporate actions. From the dangers of chasing low fees to the surprising benefits of thoughtful execution, this conversation is a masterclass in next-level investing.

 

Key Points From This Episode:

 

(0:01:07) Why Gerard was invited back: Dimensional’s approach to hidden costs and net returns.

(0:02:38) Looking beyond “index good, fees bad”—why investors should dig deeper.

(0:04:21) Gerard’s background: From Caltech rocket scientist to Dimensional co-CEO.

(0:06:22) How Dimensional differs from market-cap weighted index funds.

(0:08:42) Four components of net returns: Two increase returns, two decrease them.

(0:12:45) Defining the market: Free float, liquidity thresholds, and dynamic inclusion.

(0:17:52) How small-cap index definitions can create return differentials as high as 10%.

(0:22:03) What securities Dimensional excludes—and why: low-profitability growth, high asset growth, IPOs, and REITs.

(0:29:26) Why IPOs are excluded for 6–12 months and the mechanics behind inclusion.

(0:33:16) Why Dimensional’s exclusions aren’t like traditional active management.

(0:35:09) The “Great British Bake-Off” analogy: baking better portfolios with the same ingredients.

(0:38:13) How securities lending boosts returns—and how Dimensional does it better.

(0:42:09) Managing corporate actions (like M&A) to reduce cash drag.

(0:45:18) How Dimensional deals with buybacks and new share issuance. 

(0:47:29) Momentum, short-term reversals, and securities lending fees as trading signals.

(0:50:36) Why Dimensional may lend out stocks that have negative momentum.

(0:52:42) How trading costs affect net returns and Dimensional’s execution edge.

(0:56:06) Hidden costs of indexing: Index fund rebalancing and price impact.

(1:03:19) Why focusing solely on fees is misleading—and what “value for service” really means.

(1:06:18) DFUS: A case study of Dimensional’s market series outperforming index funds.

(1:08:44) How Dimensional builds portfolios with intentional tilts toward higher expected returns.

(1:12:35) What excites Gerard: Expanding access, ETF innovations, and global growth.

 

Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.

Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — [email protected]Benjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Gerard O’Reilly — https://www.dimensional.com/us-en/bios/gerard-k-oreilly

Dimensional Fund Advisors: https://www.dimensional.com/

Episode 322: Marco Sammon — https://rationalreminder.ca/podcast/322Marco Sammon 

Episode 198: Gerard O’Reilly — https://rationalreminder.ca/podcast/198

 

Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)