Happy Russell Reconstitution Day,June 26, 2015 is the annual reconstitution day, at least for Russell 2000.Reconstitution refers to the moment in time when indexes make changes in the list of companies in their index. Most indexes have a certain number of company stocks included which is part of the name like the S&P500 or the Russell 2000. Obviously they have 500 and 2,000, respectively.For managers that manage index funds that are supposed to follow that index, they simply hold those stocks in the proportion called for, and then on reconstitution day, they do a lot of selling and buying to account for the stocks leaving the index and joining the index. They are restricted to making the changes on the day of reconstitution.It a great time to point out the difference between "indexing" and "passive investing" or the term we prefer to use "Evidence Based Investing".Most people are aware that it is very difficult for active investors to reach the investment performance of the index most relevant to their investing asset class. So simply put "indexing works", and works very well. Even Warren Buffett, fellow Nebraska graduate and Omahan, says that the average investor would be best served investing in index funds.As mentioned above, Index funds simply track a published index...they simply buy the companies in that index.However the indexes are arbitrary - based on known published lists of companies. Human beings in a conference room usually in New York City decide which companies to keep/remove in each of the hundreds or thousands of published indexes out there. They believe the companies in the index are representative of their index.Probably even more important is how many companies are in the index. If an index is supposed to represent a particular asset class then why would you never change the number of companies in the index? By being stuck at 500 for the S&P500, or 2,000 for the Russell 2000, they are likely missing many companies that should be present to actually fully represent that asset class..This leads us to the most important point and the difference between tracking an index and evidence based investing. Indexing tracks an index, an arbitrary published list of companies that is supposed to represent an asset class, Evidence based investing first creates an exact definition of the asset class to be followed, then successfully mirrors the return of the specific defined asset class by owning nearly company that exists in that class.We believe, with certainty, that the firm that accomplishes evidence based investing most effectively is Dimensional (Dimensional Fund Advisors). O'Reilly Wealth Advisors LLC designs and oversees eight model portfolios for our clients which are built from Dimensional’s fully diversified building blocks. The moment a firm comes along and does it well - we'll look at them.By holding nearly every possible company that fits in the defined asset class you get the secondary benefit of minimizing the risk of holding individual securities since that risk is spread across more companies. This is what Dimensional does - however they do screen a few of the companies - these screens are proprietary. They avoid certain situations like companies entering bankruptcy, crooked executives, etc.Dimensional doggedly quantifies the behavior of stocks using science, statistics and mathematics. They are a known “brain trust” with a number of economic Nobel laureates involved from the start of the company and involved in key leadership positions..Since Dimensional does not track indexes, they have no constraints on how and when they acquire more shares of any one company. So, for them reconstitution day is actually a day to enhance their returns because they are not tied to the reconstitution date and most of the changes are known in advance. The stocks leaving go down in advance and the stock entering go up in advance (generally speaking).Think of it like this. Suppose person A wants to buy a particular make/model/year car that is a certain color, has certain options and want it this week. Compare that to person B (Dimensional) who wants to buy the same make/model/year car, but can buy it any time in the next six months and they are flexible on colors/options. They will acquire that auto at a significant discount to person A that places constraints which drive up the cost.Dimensional also takes advantage of some known market performance behaviors that are prevalent the vast majority of the time such as: value stocks beat growth, small company stocks beat large company stocks, and profitable companies beat less profitable companies. They are scientific, process driven and successfully take advantage of these proven market behaviors in the day-to-day management of their funds. They constantly seek to “wring every penny” out each fund. They are not only academically smart - they implement the concepts well in the funds themselves.It’s pretty simple. Most of time, Dimensional beats indexing beats active investing.Happy Reconstitution Day, Many Happy Returns!