Dimensional Provides ETF Conversion Map

Dimensional Fund Advisors finished turning four of its tax-managed mutual funds into ETFs this week, and that may give other similarly sized mutual funds a road map for making similar conversions.

The funds that began trading Tuesday include the Dimensional U.S. Equity ETF (DFUS), the Dimensional U.S. Core Equity 2 ETF (DFAC), the Dimensional U.S. Small Cap ETF (DFAS), and the Dimensional U.S. Targeted Value ETF (DFAT).

Those four funds combined amounted to $28.65 billion in assets under management as of market close Wednesday.

Each fund’s expense ratio declined as part of the transaction:

• DFUS from 0.21% to 0.11%
• DFAS from 0.43% to 0.34%
• DFAT from 0.43% to 0.34%
• DFAC from 0.23% to 0.19%

The Austin, Texas-based Dimensional first announced plans to convert the mutual funds last November.

The ETF issuer is still in the midst of converting the Tax-Managed International Value Portfolio (DTMIX) into the Dimensional International Value ETF (DFIV) and the TA World ex US Core Equity Portfolio (DFTWX) into the Dimensional World ex U.S. Core Equity 2 ETF (DFAX).

Both of those funds are focused on international equities and expect to complete conversion in September.

Dimensional isn’t the first group to have successfully turned a mutual fund into an ETF; that feat was achieved in March by Guinness Atkinson Funds when it brought the SmartETFs Dividend Builder (DIVS) and the SmartETFs Asia Pacific Dividend Builder (ADIV) to market.

But at a combined $31.84 million in assets, those two funds are tiny compared to the converted Dimensional ETFs.

Trend Likely Slow Moving

Todd Rosenbluth, director of mutual fund and ETF research at CFRA Research, told ETF.com that Dimension’s conversions are a model for other fund managers considering switching mutual funds into ETFs at a larger scale.

In particular, he thinks other tax-managed mutual funds are primed to convert because they can take full advantage of the tax structure that ETFs provide: “I think there are products from a range of different asset managers … that are tax-managed U.S. large cap strategies. It seems reasonable to think they might go the same route of converting to a mutual fund.”

That could lead to as much as $1 trillion in mutual fund assets converting to ETFs in the next decade, according to a note published Tuesday by Bloomberg Intelligence ETF analyst Eric Balchunas.

In particular, Balchunas wrote that converted funds would have the benefit of having assets already under management, and can keep their track record as a mutual fund intact.

However, Rosenbluth doesn’t expect a wave of conversion filings to hit regulators’ inboxes in the near term. He says that mutual funds may find it difficult to get shareholder approval from the myriad of advisors, retail investors and proxies that hold sway over the funds’ futures.

He also believes some mutual fund operators won’t want to give up their selection strategies through the process of publicizing each fund’s holdings.

Contact Dan Mika at [email protected]

Note: this story has been edited to clarify that four funds' combined assets under management figure as of market close on June 16.