How do you go from near-zero to 60 mph in a flash in the exchange-traded fund industry? In the case of Dimensional Fund Advisors, it converted four large, existing equity mutual funds into ETFs on a single day, and voilà . . . it went from having $1.6 billion in assets among three existing equity ETFs and a 50th-place ranking among U.S. ETF sponsors, to $30 billion in assets and the 13th spot on the leader board, according to ETF.com.
The Austin, Texas-based asset manager, which oversees $637 billion in total assets and has a loyal following among many financial advisors, on Monday converted four of its U.S.-focused tax-managed mutual funds into active transparent ETFs. That roster comprises the Dimensional U.S. Equity ETF (DFUS), Dimensional U.S. Core Equity 2 ETF (DFAC), Dimensional U.S. Small Cap ETF (DFAS) and Dimensional U.S. Targeted Value ETF (DFAT).
These converted ETFs aren’t actively managed in a traditional sense. Rather, they incorporate Dimensional's hybrid investment approach that's both passive and active. The company calls itself a systematic active manager that looks at the overall equity universe and isolates so-called dimensions, or factors—small capitalization, lower valuations and higher profitability—it believes can create market outperformance over the long haul. The strategies among its ETFs, mutual funds and separately managed accounts employ risk management via active rebalancing based on those factors.
“We have the benefits of indexing, or passive, which is low cost and high diversification and transparency, with the benefits of active, which is flexible implementation,” a Dimensional spokesman said.
The four new ETFs have expense ratios ranging from 0.11% to 0.34%. These products join Dimensional’s three existing core equity ETFs that launched late last year. Those products charge fees ranging from 0.12% to 0.35% and have found an audience—as mentioned, they’ve gathered a collective $1.6 billion in assets.
In September, the company plans to convert its Tax-Managed International Value Portfolio mutual fund into the Dimensional International Value ETF, and its TA World ex U.S. Core Equity Portfolio mutual fund into the Dimensional World ex U.S. Core Equity 2 ETF.
“We have a lot of mutual funds, but we chose to convert the mutual funds that have a specific tax-management focus,” the Dimensional spokesman said. “ETFs provide additional tools through the creation and redemption process to manage the tax impact and after-tax returns.
“There are pros and cons to ETFs, mutual funds and separately managed accounts, and we plan to have a full lineup of ETFs that sit along side our mutual funds and separately managed accounts,” he added.
Dimensional is the second company to convert a mutual fund into an ETF. Guinness Atkinson did that in March when it converted two of its mutual funds into the SmartETFs Dividend Builder ETF (DIVS) and SmartETFs Asia Pacific Dividend Builder ETF (ADIV). But at least one industry observer doesn’t expect this to become a big trend.
Todd Rosenbluth, head of ETF and mutual fund research at CFRA, offered that the most likely conversion candidates will be relatively small mutual funds that put an emphasis on tax-efficiency, have low turnover and have management that’s comfortable with the full portfolio transparency that comes with ETFs.
“We’re more likely to see a continuation of the trend that has happened where asset managers launch ETF versions of mutual funds with semi-transparent products like we’ve seen Fidelity, T. Rowe Price and American Century do," he said. "That enables them to play in both the mutual fund and ETF worlds, even though the pendulum is swinging toward ETFs.”