Trending
For fans of exchange traded funds industry seminal events and fun facts, a big one arrived on Monday when the Securities and Exchange Commission (SEC) granted Dimensional Fund Advisors’ (DFA) exemptive relief to offer ETF share classes of its mutual funds.
DFA becomes the first firm since Vanguard to land that permission. A related patent held for more than two decades by Vanguard expired in 2023, opening the doors for other asset managers to seek regulatory permission for ETF share classes of existing mutual funds.
Indeed, the news is significant, particularly for DFA, which has rapidly become an ETF behemoth. The firm the largest issuer of actively managed ETFs and the seventh-largest U.S. ETF issuer overall – both of which are extremely impressive when considering it hasn’t even been five years since Dimensional introduced its first ETFs.
Interestingly and coincidentally, the SEC announcement came to pass five years to the day that DFA rolled out its first ETF.
Big News for Advisors, Clients
Texas-based DFA has $915 billion in assets under management, confirming the issuer has significant penetration in the wealth management community. It’s not a stretch to assume that the with the ETF share class approval, that figure will, perhaps rapidly, ascend to $1 trillion and beyond.
Impressive superficial data points to be sure, but there are more tangible benefits for advised investors in the DFA news. Notably, advisors can now offer clients lower-cost, more tax-efficient versions of popular open-end mutual funds.
“Shareholders in an ETF share class can benefit from the daily cash flows from shareholders in the mutual fund,” said the asset manager in a statement. “Cash flows can be used for portfolio rebalancing while allowing for additional flexibility in the use of custom create and redeem baskets. This flexibility can lower total portfolio transaction costs. ETF share classes also can benefit from the existing broad base of investors in Dimensional’s mutual funds and the benefits of scale that generally come with well-established funds including diversification, reduced expenses, and the potential for increased securities lending.”
Point is clients and retails are now getting more choice when it comes to accessing Dimensional funds and everyone, be they ETF fans or mutual fund devotees, loves having options.
“The joining of mutual funds and ETFs through share classes represents a significant enhancement in how millions of Americans can access financial markets in the future,” says DFA Co-CEO and Co-CIO Gerard O’Reilly. “Share classes allow investors to choose the investment strategy that best suits their needs as a first-order consideration, and then select their ideal wrapper to access that strategy, while broadening benefits of increased tax efficiency and reduced costs from scale.”
What’s Next
There will be more approvals for ETF share classes courtesy of well-known issuers. That’s not an out-on-a-limb assertion. It’s actually a when not if claim.
Specific to DFA, last month the asset manager filed to offer ETF share classes on 13 mutual funds focusing on domestic equities. That group includes large-, micro- and small-cap stocks, real estate and value-driven strategies.
“The selected funds represent a generally comprehensive list of Dimensional’s US equity mutual fund offerings and, because there are fewer service providers to coordinate, were the most operationally straightforward for adding ETF share classes. Dimensional will continue to work with its fund boards to determine subsequent candidates for ETF share classes,” concludes the issuer.
Related: Thrivent Boosts ETF Roster With Pair of Mutual Fund Conversions