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The Driving Force Behind Dimensional Fund Advisors’ First ETFs

Advisors and allocators – not recent outflows – spurred creation of the new exchange-traded funds.

Dimensional Fund Advisors, the storied asset manager with $506 billion, plans to launch its first exchange-traded funds later this year. The Austin-based fund company filed a preliminary registration statement with the Securities and Exchange Commission for three actively-managed ETFs Friday morning.

Financial advisors and other allocators had been expressing their interest in ETFs to Dimensional, or DFA, for years. Those conversations picked up, and the asset manager began in earnest thinking about launching ETFs more than a year ago, Dave Butler, a director and the co-CEO of Dimensional Fund Advisors, told RIA Intel.

“I am actually really excited. We think that we can have the same impact in the ETF space that we had in the mutual fund space,” Butler said.

The three ETFs will be broadly diversified and focus on core exposure to U.S. companies across all market capitalizations; non-U.S. developed companies; and non-U.S. emerging markets, respectively. The funds, expected to launch later this year, will be actively managed in the transparent ETF structure and under the “same investment philosophy, research, and systematic investing approach as our existing portfolios,” DFA said in a statement about the funds. The filing did not mention expenses or ticker symbols.

The ETFs will be Dimensional’s first retail offering, traded publicly on exchanges — a departure from the asset manager’s historic way of doing business. The company has only ever offered mutual funds, separately managed accounts, and commingled trusts, to advisors it has approved. RIAs who use the funds adore DFA — just don’t call it a cult.

It’s not as dramatic a change as it might appear, according to Butler, especially considering the demand from advisors and other users. DFA prides itself on what it internally refers to as the “feedback loop,” its rolling conversation with clients that has shaped its lineup of funds and other offerings since its founding almost 40 years ago. For example, one RIA in Illinois couldn’t find the bond fund it wanted, so it partnered with DFA to create what became the asset manager’s Global Core Plus Fixed Income Portfolio.

“The term exclusivity gets thrown around quite a bit but from day one it’s really been about supporting the advisor and delivering the right investment experience for the clients,” said Butler, who has worked at DFA for 25 years.

And Dimensional still believes that people and companies in financial services should stick to their core competencies as asset managers and financial advisors. “The ETF is obviously a retail offering but we have no interest in working directly with the end client,” Butler said.

Prior to the Covid-19 pandemic, which caused a historic market downturn and led some investors to exit the market, the stream of money flowing to Dimensional relative to the money leaving had weakened. The last half of 2019 was unlike any in more than a decade. Although net flows for all of 2019 were $4.58 billion, DFA ended the year with four straight months of outflows totaling an estimated $4.47 billion, according to Morningstar.

“The flows are not mammoth compared to the asset base they have. I think what is going to be interesting is will [DFA’s net flows] continue downward, or flatten out, or bounce back once we get past the worst of this virus?” Daniel Sotiroff, a manager research analyst at Morningstar, said.

But the new funds were not a response to recent outflows or some omen for the asset manager, according to Butler. “The cash flow aspect of this, positive or negative, has nothing to do with our launching of ETFs,” he said.

Dimensional expects there will be a “good uptake” of its debut ETFs. No funds are launched as experiments and (knowing the demand is there) if DFA builds it, it expects assets will come. The company doesn’t make any specific business plans based on expected flows for new funds, Butler said. 

Clients trust in the DFA process and some might not wait and move money into the ETFs right when they launch, the executive said. They’ve been waiting on the asset manager and the moment has arrived.

“We think the timing is right,” Butler said.

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Contact Michael Thrasher at michael.thrasher@institutionalinvestor.com or securely message him on Signal: 330-962-6441. Follow him on Twitter @Mike_Thrasher.

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