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Helped by enviable brand recognition, trust in the advisor community and a slew of mutual fund-to-ETF conversions, Dimensional Fund Advisors (DFA) has overcome a late entry into the world of exchange traded funds to accrue some impressive feathers in its cap.
Those include being 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.
Those statuses could be expanded and fortified because the Securities and Exchange Commission (SEC) has given Dimensional the green light to offer ETF and mutual fund share classes. It’s been roughly two years since Vanguard’s patent expired, opening the door for exclusion of ETF share classes from Rule 6C-11. Or in plain English, Vanguard once held a monopoly on being able to introduce ETF classes of previously established index and mutual funds.
Count Dimensional among the issuers looking to capitalize on expiration of that patent.
Why It Matters for Dimensional Clients
Over the past several years, roster of mutual fund-to-ETF conversions has increasingly included old mutual funds, funds with sizable asset bases, products from well-known issuers or all three of those traits. It’s possible that with the Vanguard patent expired, the fund-to-ETF conversion swell will morph into a tidal wave of ETF share class applications and launches. That playbook has its advantages.
Indeed, the SEC approval makes it easier for Dimensional (and any issuer that lands such confirmation) to add ETF share classes to existing open-end mutual funds. It’s a more efficient avenue than converting a mutual fund to the ETF wrapper or bringing a new ETF to market.
As Dimensional co-CEO and Co-CIO Gerard O’Reilly points out, ETF share classes can benefit end users, including advisors and their clients.
“Shareholders in an ETF share class could benefit from the daily cash flows of shareholders in the mutual fund,” notes O’Reilly. “Cash flows can be used for the dual purpose of strategically rebalancing the fund while allowing for additional flexibility in the use of custom create and redeem baskets. This flexibility can lower total portfolio transaction costs.”
As the Dimensional boss points out and as the Vanguard patent proved, ETF share classes tied to established, successful mutual funds often become successful ETFs in their own right, benefiting from the mutual funds’ scale and performance (when applicable).
Expect an ETF Share Class Tidal Wave
It’s not a stretch to say that, pending regulatory approval, a slew of ETF share classes of existing mutual funds will eventually come to market. O’Reilly notes that since Dimensional filed its exemptive relief application with the SEC, 70 competitors with a combined $27 trillion in assets under management did the same.
Translation: Even if the SEC approves ETF share classes for a small percentage of those assets, say just 10% and that’s admittedly very conservative, a sizable batch of “new” ETFs tied to existing mutual funds could be coming to market in the months ahead. As for Dimensional clients, including advisors, they’ve got plenty to look forward to as well.
“What will set Dimensional’s solutions apart is our time-tested investment philosophy, flexible active implementation, and a commitment to keeping costs low while constantly seeking to enhance investors’ outcomes,” concludes O’Reilly. “It’s why over 20 years, 100% of Dimensional funds have survived and 84% have outperformed their benchmarks compared to the active fund industry, while just 47% of funds have survived over the same period and only 16% have survived and outperformed their benchmarks.”