In Active ETFs, Dimensional Puts ‘D’ in Dominance

Actively managed exchange traded funds are gaining traction and advisors are big reason why that’s the case. As of the end of the first quarter, there “were 3,084 actively managed ETFs with assets of $838 billion, from 436 providers listed on 37 exchanges in 29 countries at the end of March,” according to ETFGI.

The research firm added that month-over-month growth for active ETFs was north of $48 billion in terms of added assets, marking the 48th straight month of inflows to active ETFs. Yes, those are global numbers highlighted by ETFGI, but the bulk of all ETF assets, active or passive, reside in the U.S. One of the reasons the U.S. is the leader in active ETFs is because fund issuers are awakening to advisors’ and investors’ preference for the ETF structure, converting familiar mutual funds to the ETF wrapper.

Speaking of familiar, Dimensional Fund Advisors (DFA) – an issuer with which many advisors and wealth managers are intimately familiar – is leading the active ETF renaissance. Consider the following. DFA introduced its first ETFs in November 2020 – a pair of active non-transparent products. In the span of less than four years, Dimensional has become the eighth-largest ETF issuer in the U.S. and has accomplished that feat with a line-up that leans heavily into active management.

Putting DFA’s active dominance into context, the $135 billion in assets under management residing the firm’s actively managed ETFs at the end of the first quarter accounted for 20% of U.S. active ETF assets.

Why DFA Is Dominating Active ETF Space

Multiple reasons explain DFA’s leadership in the active ETF landscape. More than four decades in business and strong brand recognition in the advisors community surely help.

While those might be perceived as superficial factors, DFA funds depart from rivals in some aspects. Plus, the firm offers a slew of cost-efficient products relative to the broader active mutual fund space.

“DFA funds are generally seen as falling under the umbrella of strategic beta index funds, which invest in stocks according to a particular style of factor investing, like value investing,” notes Gabe Alpert of Morningstar. “In that sense, the funds are seen as actively managed rather than tracking a predetermined index, which includes forced rebalancing of holdings when the underlying indexes change. DFA funds focus on making smaller trades with fewer shares throughout the year to keep costs down, because the large, predictable rebalancing trades index funds make can incur higher trading costs.”

Daniel Sotiroff, senior manager research analyst at Morningstar, points out that DFA was smart to pursue its entry into the ETF arena. For most of the 2010s, the issuer hauled in assets, but performance lagged because large-cap growth stocks were in style for much of that decade while DFA focused on value and small-cap fare. As Sotiroff notes, DFA’s 2017 inflows of $31 billion turned into $38 billion of outflows in 2020.

ETFs = Shrewd Move for DFA

Fund companies are in business to make money and there’s nothing wrong with that. If was outflows from traditional active mutual funds that played a role in DFA entering the ETF industry, then so be it.

Point is the company made the move and did so in advance of some of its rivals. Sure, some of the inflows to DFA ETFs are from advisors and clients moving over from the firm’s mutual funds, but the move is also likely to broaden its client base over the long-term.

“He (Sotiroff) says moving into ETFs likely helped DFA reach retail investors that it couldn’t when it mostly sold funds through financial advisors and similar intermediaries. He also points out that a significant quantity of flows to DFA’s ETFs may be from investors simply moving their money there from the company’s mutual funds,” concludes Alpert.

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