DFAC ETF: Is Its Small-Cap Tilt Still Worth the Premium in 2026?

The Dimensional U.S. Core Equity 2 ETF (DFAC) has long been a favored vehicle for investors seeking exposure to small-cap equities with a factor-based tilt toward value and profitability. However, as market commentary indicates, the U.S. 10-year Treasury yield hovers near 4.19% in late 2025 and projects to remain rangebound between 3.75% and 4.25% in 2026, the question arises: Does DFAC's 0.17% fee and its small-cap strategy still justify a buy rating in a macroeconomic environment where rising interest rates could dampen equity valuations?

Interest Rate Sensitivity and Small-Cap Dynamics

Small-cap stocks, which constitute a significant portion of DFAC's portfolio, are inherently more sensitive to interest rate changes than their large-cap counterparts. This is because smaller companies often rely on debt financing and operate in sectors with lower margins, making them vulnerable to higher borrowing costs. As of December 2025, the 10-year Treasury yield has edged upward to 4.19%, reflecting investor anticipation of the Federal Reserve's cautious approach to inflation and potential rate cuts in 2026 as per market data.

Historically, small-cap earnings have shown resilience during periods of moderate rate hikes. For instance, the Russell 2000's combined two-year earnings growth is projected to reach 77.8% in 2026, outpacing the Russell 1000's 25.7%. This optimism is fueled by improving corporate fundamentals and the expectation of Fed rate cuts, which historically benefit small-cap stocks due to their sensitivity to short-term borrowing costs. However, rising long-term Treasury yields-such as the 10-year-pose a challenge by compressing the present value of future earnings, particularly for unprofitable small-cap firms. About 40% of Russell 2000 companies were unprofitable in the past year, underscoring their vulnerability to valuation pressures.

DFAC's strategy includes factor-based screening to avoid the worst-performing unprofitable small-cap companies, but its exposure to smaller firms remains a double-edged sword. If the 10-year yield stabilizes or falls, DFAC's small-cap tilt could generate alpha. Conversely, a sustained rise above 4.2% could amplify risks, as the fund's valuation screens may not fully insulate it from broader market corrections.

Valuation Realism and Fee Justification

DFAC's valuation metrics suggest a disciplined approach to equity selection. The ETF trades at a price-to-earnings ratio lower than the Russell 3000 index, reflecting its focus on value and profitability. Its ALTAR Score™ places it in the 48th percentile among U.S. equity ETFs, indicating valuations align with fundamentals as per ETF data. However, the fund's 0.17% expense ratio, while competitive compared to its peer group as reported by ETF analysts, must be weighed against its performance during past rate hikes.

In 2022, when the Fed aggressively raised rates, DFAC delivered a total return of -14.93%-a steeper decline than the S&P 500's -19.44%. This underperformance highlights the fund's vulnerability during rapid rate hikes, though its 2023 and 2024 rebounds (21.96% and 19.61%, respectively) demonstrate resilience in stabilizing markets. The key question is whether DFAC's factor-based strategy can offset the drag of rising yields in 2026.

Strategic Positioning Amid Macroeconomic Uncertainty

DFAC's blend of small-cap and large-cap exposure-anchored by mega-tech firms like NVIDIA and Microsoft-provides a stabilizing influence. Large-cap holdings generate consistent dividends and are less sensitive to interest rate volatility, balancing the risk profile of smaller, growth-oriented stocks. This diversification is critical in a 2026 environment where the Fed's policy trajectory remains uncertain.

Moreover, DFAC's low portfolio turnover (4%) and tax-efficient structure enhance its appeal for long-term investors. While the fund's performance during the 2015–2018 rate hike period is not explicitly documented, its recent track record suggests it can navigate moderate rate increases if small-cap earnings continue to outperform large-cap growth.

Conclusion: A Calculated Buy?

DFAC's small-cap tilt remains a compelling feature in a market where earnings growth for smaller firms is expected to outpace large-cap peers. However, its effectiveness hinges on the trajectory of Treasury yields. If the Fed maintains a "slightly restrictive" stance and yields remain rangebound, DFAC's factor-based strategy and valuation discipline could justify its 0.17% fee. Conversely, a sharp rise in long-term rates could amplify risks, particularly for unprofitable small-cap holdings.

Investors should monitor quarterly fact sheets from Dimensional Fund Advisors to assess shifts in small-cap exposure and the fund's positioning relative to macroeconomic signals. For now, DFAC appears to offer a balanced approach to small-cap investing, but its premium must be weighed against the evolving interest rate landscape.