Dimensional makes ETF debut, reveals plan to convert mutual funds

Nov 18th, 2020 | By | Category: Equities

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Dimensional Fund Advisors has marched confidently into the ETF arena by launching two multi-factor strategies and announcing plans to convert six existing mutual funds into ETFs early next year.

Dimensional makes a splash on ETF debut

Dimensional Fund Advisors has launched its first fully proprietary ETFs while also revealing plans to convert six mutual funds to ETFs early next year.

Dimensional, which currently manages over $500 billion in assets under management, is a torchbearer for systematic factor investing, having refined its approach over a period of four decades.

The firm is also no stranger to the world of ETFs, having created indices that underlie ETFs offered by John Hancock in the US and Manulife in Canada; however, the current launches represent Dimensional’s first fully independent foray into ETFs.

Listed on NYSE Arca, the launches include the Dimensional US Core Equity Market ETF (DFAU US), which comes with an expense ratio of 0.12%, and the Dimensional International Core Equity Market ETF (DFAI US), which costs 0.18%.

The funds offer broadly diversified all-cap exposure to US and global developed ex-US equity markets, respectively.

While the ETFs are actively managed, Dimensional’s approach is akin to enhanced index investing in that it is driven by clearly defined quantitative rules and the resultant portfolios exhibit only light tilts away from conventional market cap-weights based on size, value, and profitability factors.

Dimensional plans to add an emerging markets fund to the suite next month.

Alongside this, the quant giant has filed a preliminary registration statement with the US Securities & Exchange Commission to convert six of its tax-managed mutual funds, which collectively house around $20bn in AUM, into actively managed transparent ETFs. Each conversion is expected to be structured as a tax-free event.

The funds would be amongst the first to convert into ETFs using the SEC Rule 6c-11, potentially opening the door for many other mutual fund managers to recast their products in this fashion.

According to Dimensional, while the six mutual funds already deliver tax efficiency similar to what is available in the ETF market, their conversion will provide an additional tool to manage capital gains, supporting the funds’ goal of delivering higher after-tax returns.

Each converted ETF will see its expense ratio reduced, while clients will also now be able to trade the ETFs on brokerage platforms without paying commissions, further helping to lower costs for investors.

The proposed conversions and expense ratio reductions are outlined below:

The Tax-Managed US Equity Portfolio will convert to the Dimensional US Equity ETF (DFUS US) and its expense ratio will be reduced from 0.21% to 0.11%.

The Tax-Managed US Small Cap Equity Portfolio will convert to the Dimensional US Small-Cap ETF (DFAS US) and its expense ratio will be reduced from 0.43% to 0.33%.

The Tax-Managed US Targeted Value Portfolio will convert to the Dimensional US Targeted Value ETF (DFAT US) and its expense ratio will be reduced from 0.43% to 0.33%.

The TA US Core Equity 2 Portfolio will convert to the Dimensional US Core Equity 2 ETF (DFAC US) and its expense ratio will be reduced from 0.23% to 0.19%.

The Tax-Managed International Value Portfolio will convert to the Dimensional International Value ETF (DFIV US) and its expense ratio will be reduced from 0.50% to 0.35%.

The TA World ex-US Core Equity Portfolio will convert to the Dimensional World ex-US Core Equity 2 ETF (DFAX US) and its expense ratio will be reduced from 0.30% to 0.25%.

Gerard O’Reilly, co-CEO and Chief Investment Officer of Dimensional Fund Advisors, commented, “We’re pleased to broaden our ETF platform in a way that can help investors manage taxes even more efficiently. We believe these strategies fill a unique space in the market, providing the benefits of passive investing, including low-cost diversified exposure to stocks, combined with the advantages of active investing such as higher expected returns, flexible trading, robust daily portfolio management, and risk management.”

Fellow co-CEO Dave Butler, added, “We want our clients to have the tools they need to help investors meet their financial goals. Financial professionals use different vehicles to invest in the capital markets, including mutual funds, ETFs, separate accounts, and trusts. We’re committed to providing choices in how they access our investment expertise on behalf of their clients.”

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