Dimensional rolls out four fixed income factor ETFs

Nov 17th, 2021 | By | Category: Fixed Income

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Dimensional Fund Advisors has launched four transparent actively managed ETFs on NYSE Arca which seek to harvest factor premia exhibited within fixed income markets.

Gerard O’Reilly, co-CEO and Chief Investment Officer, Dimensional Fund Advisors

Gerard O’Reilly, co-CEO and CIO of Dimensional Fund Advisors

A torchbearer for factor-based investing, having refined its approach over a period of four decades, Dimensional introduced its first bond fund in 1983 and currently manages more than $120 billion in fixed income assets.

The new listings, which represent the firm’s first fixed income ETFs, provide exposure to USD aggregate, short-duration USD aggregate, municipal, and inflation-protected strategies.

Instead of trying to outguess the market or time interest rates, the funds aim to systematically capture factor premia while controlling risk relative to broad market benchmarks.

Specifically, the funds seek to capture credit premia, the expected incremental return from investing in securities with greater credit risk compared to US Treasuries, and term premia, the expected relative return from investing in longer-dated securities compared to shorter-dated securities, when these factors are perceived to be favourable.

Gerard O’Reilly, co-CEO and CIO of Dimensional Fund Advisors, commented: “Just as multi-factor equity investing has gained prominence over the last decade, we believe investors will increasingly look to systematic fixed income solutions which present reliable and transparent means of accessing bond markets and the flexibility to target higher expected returns.”

Dave Plecha, Global Head of Fixed Income at Dimensional Fund Advisors, added: “Fixed income investing has long been inundated with active strategies that try to outguess markets and passive funds that are too rigid to nimbly target higher returns. Dimensional fixed income solutions go beyond indexing and provide flexibility to navigate dynamic market conditions in a cost-effective and transparent way.”

The funds

The Dimensional Core Fixed Income ETF (DFCF US) serves as a core USD investment-grade solution providing exposure to multiple bond sectors including government and corporate bonds, mortgage-backed securities, bank obligations, commercial paper, repurchase agreements, and money market funds. The fund comes with an expense ratio of 0.19%.

The Dimensional Short-Duration Fixed Income ETF (DFSD US) also invests across multiple USD investment-grade fixed income markets, but will typically only hold securities that mature within the next five years. The fund comes with an expense ratio of 0.18%.

The Dimensional National Municipal Bond ETF (DFNM US) invests in a range of tax-advantaged, investment-grade municipal securities including revenue bonds, general obligation bonds, industrial development bonds, municipal lease obligations, commercial paper, and variable rate demand obligations. While the fund aims to capture both credit and term premiums, it will generally maintain a portfolio duration within six months of the benchmark S&P Intermediate Term National AMT-Free Municipal Bond Index. This fund also comes with an expense ratio of 0.18%.

The Dimensional Inflation-Protected Securities ETF (DFIP US) provides exposure to inflation-protected securities issued by the US government and its agencies. The fund aims to capture term premiums, but will also maintain a duration profile that does not stray too far from the benchmark Bloomberg US TIPS Index. The fund comes with an expense ratio of 0.11%.

Coinciding with the recent launches, Dimensional has submitted papers with the SEC seeking approval for the listing of a further ten transparent, actively managed ETFs. The proposed funds will offer exposure to a variety of US, developed international, emerging markets, and real estate equities while targeting companies based on known drivers of higher expected returns.

The fund filings reference the following:

Dimensional International Core Equity 2 ETF
Dimensional Emerging Markets Core Equity 2 ETF
Dimensional US Small Cap Value ETF
Dimensional International Small Cap ETF
Dimensional International Small Cap Value ETF
Dimensional Emerging Markets Value ETF
Dimensional US High Profitability ETF
Dimensional International High Profitability ETF
Dimensional Emerging Markets High Profitability ETF
Dimensional US Real Estate ETF

Dave Butler, co-CEO of Dimensional Fund Advisors, said: “Dimensional’s expanded ETF suite leverages the firm’s 40-year track record of thoughtful research and meticulous implementation of the best ideas in financial science. We dedicate every day to sharpening our research and its practical application across our full offering of mutual funds, ETFs, and SMAs in pursuit of the best possible investment experience for every client.”

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