Dimensional’s conversion of mutual funds into ETFs pays off

Dimensional Fund Advisors’ decision to convert a number of mutual funds into exchange traded funds has been vindicated after the first four such vehicles pulled in $4.2bn in a year even as the company’s mutual funds bled $14bn.

The largest of the converted ETFs, the $13.8bn TA US Core Equity 2, has notched net inflows each month since the conversion, according to the data from Morningstar, totalling $2.1bn as of May 31.

Since switching over the initial batch, the company has converted three other mutual funds to ETFs. The firm has also launched 17 ETFs since first rolling out such vehicles in November 2020.

Dimensional’s suite of 24 ETFs collectively attracted $14bn during the year ended May 31, with about $5.8bn of that going into the ETFs that were previously offered as mutual funds, according to Morningstar’s database. Altogether, the ETF suite had $58bn in assets as of the same date.

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The firm has vaulted to become the 10th-largest US ETF sponsor, just $1bn in assets behind VanEck according to Morningstar Direct. The shop is the largest provider, in terms of assets under management, of active ETFs.

“They’ve got a new avenue to gain some assets,” said Daniel Sotiroff, Morningstar analyst. “It looks very optimistic for them at this point.”

Dimensional entered the ETF market with “a super strong brand and reputation,” said Dave Nadig, financial futurist at VettaFi. “They built their business on the back of sophisticated advisers, and those same advisers are likely driving their strong growth since the conversions.”

A Dimensional spokesperson said that the firm expected its ETFs to be swiftly adopted because of “the collaborative relationships we have with the financial professionals we work with and the desire to implement Dimensional’s systematic investment approach in an ETF structure”. The “meaningful growth” that Dimensional’s converted ETFs have experienced “is evidence that advisers agreed with our decision to convert tax-managed mutual funds to ETFs”, he wrote in an email.

The firm’s mutual funds, on the other hand, have not fared as well with sales during the past several years, and the ETF suite’s positive flows may “plug a hole” in the gush of redemptions from the mutual funds, Morningstar’s Sotiroff said.

Dimensional’s mutual funds suffered net outflows of $14.1bn in the year to May 31.

Although Dimensional’s relatively newly minted ETFs have attracted investor assets, the revenue that the firm collects from the products is less than it gathers from mutual funds.

The firm’s largest ETF, the $14.6bn US Core Equity 2, charges 19 basis points, or 4 bps less than the product’s institutional share class did when it was a mutual fund. And the gap between the fees is larger in other cases.

Dimensional is wrapper-agnostic, the firm’s spokesperson said. “By offering a growing suite of mutual funds and ETFs and expanding our separately managed accounts . . . offering, we feel confident that we’re well positioned to serve investors’ current and future needs,” he said.

While ETFs have gained popularity among investors, mutual funds are likely to maintain a prominent place in the US investment landscape — and in Dimensional’s product mix — in large part because the retirement system has grown up with mutual funds at its centre. Retirement plan platforms typically do not accommodate ETFs’ intraday trading.

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