For decades, Dimensional Fund Advisors was famous on Wall Street for its exclusive admission policy: Only a hand-selected network of financial advisors enjoyed access to their systematic mutual funds.
All that changed drastically three years ago when the quant giant capitulated to the exchange-traded fund revolution.
Now the Austin-based firm’s pivot — a milestone for the ETF community — is paying off. Its lineup of nearly 40 ETFs has amassed over $100 billion thanks to inflows and fund conversions, making it among the top 10 largest US issuers in the $7.3 trillion industry.
At the same time, its mutual-fund business has shed roughly $74 billion in flows since its ETF debut as clients migrate to the low-cost and tax-efficient investment strategies, Bloomberg Intelligence data show.
Dimensional’s ETF embrace — far from painless as fees everywhere hit rock-bottom levels — underscores the existential challenges that asset managers are grappling with across the industry.
“Before we had ETFs available, it was, ‘we like your investment proposition, we appreciate your support model, but we typically only use ETFs,’” said Gerard O’Reilly, Dimensional’s co-CEO and chief investment officer, in a phone interview. “We definitely have a bigger client footprint than we did pre-ETF.”
ETFs have taken in more money than mutual funds, excluding money-market funds, for 11 consecutive years, with the latter on track for a sixth straight year of outflows, Investment Company Institute data compiled by Bloomberg show. This year, investors have pulled nearly $473 billion from mutual funds while their exchange-traded brethren have attracted more than $351 billion.
That one-way travel has driven industry heavyweights to build out ETF businesses over the past decade. Capital Group and Morgan Stanley were among the last holdouts, before both launched their own products in recent years.
“ETFs are the opposite of exclusive but that’s where all the fish are biting,” said Bloomberg Intelligence senior ETF analyst Eric Balchunas. “Every big legacy asset manager is going to have to go through this painful but necessary transition, so better now than never.”
At the same time a seemingly endless race-to-the-bottom has sparked a collapse in expense ratios as issuers fight for market share. While it’s good news for end-investors, it’s a painful setup for asset managers’ margins.