Q&A: Why this asset manager is converting mutual funds to ETFs | Financial advisers

Exchange-traded funds, or ETFs, have not yet reached their 30th anniversary, but their market share has grown remarkably. Since the launch of the first ETF in 1993, the ETF market has grown to over 1,670 ETFs, representing $ 5.1 trillion in net assets at the end of last year.

Financial advisers and investors increasingly prefer ETFs over mutual funds because of their relatively lower cost and tax-advantaged nature. As demand increases, fund providers are struggling to keep pace. They can increase the supply in one of three ways: by issuing more shares of existing ETFs, creating entirely new ETFs, or converting existing mutual funds into ETFs.

Dimensional Fund Advisors, a global asset manager, was one of the first managers to convert some of its mutual funds to ETFs.

As part of the largest such conversion to date, the company recently converted four of its U.S. mutual funds to ETFs, making Dimensional one of the largest active global ETF issuers in the industry with around $ 30 billion in combined ETF assets under management.

We spoke with Althea Trevor, Head of Equity Portfolio Strategies and Vice President of Dimensional Fund Advisors, about this conversion and what it means for financial advisors and investors. Here are edited excerpts from this interview.

What motivated Dimensional’s decision to continue with these conversions?

We have been observing the ETF landscape for many years. We have witnessed the evolution in this space and now believe that we can integrate the active implementation of Dimensional into an ETF structure.

If we can offer a similar strategy in different vehicles, we would like to offer this choice to our customers.

What are the main advantages of converting these mutual funds to ETFs?

There are four advantages to converting tax-managed mutual funds to ETFs.

First, better tax efficiency. Converting to an ETF structure may offer advantages with respect to the management of capital gains distributions, allowing potentially greater tax efficiency for the funds.

Second, each reorganization will result in significant reductions in management fees, which represents an average reduction of 27% on an asset-weighted basis for all funds converted.

ETFs also trade without transaction fees on many platforms.

Finally, shareholders will not recognize a taxable gain on the conversion of the mutual fund into ETF shares for US tax purposes.

What makes Dimensional’s solutions different from index products, which represent the vast majority of ETF assets on the market?

We believe that these strategies occupy a unique space in the ETF market, combining the benefits of passive investing, including low-cost diversified exposure to stocks, with the benefits of active investing, such as higher expected returns. high, flexible trading, robust daily portfolio management and risk management.

While the ETF market is established, the vast majority of existing funds are index solutions: 98% of ETF equity assets and 96% of total ETF assets are index solutions. We are still very early in the development of the active equity ETF space.

While an index fund is a good place to start for portfolios, investors can leave money on the table by missing out on the increased return potential of more strategic management, such as daily rebalancing, trading. flexible, securities lending and wise tax management.

What plans do you have for the future in the ETF space?

After launching our first ETFs in 2020 and converting four mutual funds to ETFs in 2021, we plan to continue to expand our range of ETFs based on client needs. We previously announced our intention to convert two other non-US tax-managed mutual funds to ETFs in September 2021, as well as the filing of an initial registration statement for four fixed income ETFs.

What role would the four new ETFs play in a client portfolio?

Dimensional ETFs offer a range of equity solutions that include market-wide equity portfolios with varying degrees of emphasis on the drivers of expected returns, as well as component solutions such as value portfolios and small cap.

We believe this range of strategies provide the building blocks for customizing an asset allocation, helping finance professionals meet the specific investment objectives and needs of their various investor bases.


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