“We don’t necessarily have enough time to analyze 300 different stocks and bonds,” he says. “So we might analyze the universe of ETFs instead.”
If anyone at DFA needed persuading about the direction the industry was heading in, they didn’t have to look far.
Eduardo Repetto was co-CEO at the firm until his departure in 2017. Last year, with the backing of American Century Investments, he launched Los Angeles-based Avantis Investors.
The Avantis investment philosophy is almost identical to that of DFA, and its website names no fewer than 14 employees who used to work for the quant giant. The difference is Avantis uses ETFs.
“It’s a more modern technology,” Repetto says. “You don’t use a pay phone. You use an iPhone.”
In less than 12 months, Avantis has amassed $1.4 billion across its five funds. DFA posted $21 billion of outflows over the past year, Morningstar data show.
DFA chief Butler says the decision to offer ETFs -- just three to start, a fraction of the firm’s overall offerings -- has no link to the early success of Avantis.
Discount DFA
The capitulation of a long-term ETF holdout like DFA raises a question: How many more will do the same?
Most active managers, be they systematic or discretionary, have struggled to beat bland index funds in recent years, and face mounting pressure to justify their typically higher fees.
At the same time, intense competition has pushed charges ever closer to zero in the ETF world, compounding the risk of cash fleeing mutual funds. Even slow-moving DFA has been unable to ignore pressures like that, and last year the firm cut charges on 77 of its funds.
For many active managers, the 2019 ETF rule change may have been the breakthrough they were waiting for.
Among other things, new regulations have dramatically lowered the disclosure demands for certain structures, meaning a firm can offer the tax benefits and easy access of an ETF without fully exposing their proprietary strategies. It sets the stage for more names to follow DFA’s lead.
“It’s a changing marketplace and DFA finally came around and said, ‘We will provide,’” Ferri says. “In the next 10 years it’ll be very rare to find any mutual fund company that doesn’t have ETFs.”
This article was provided by Bloomberg News.