Dimensional converts two more funds into ETFs
Legendary quant house Dimensional Fund Advisors has just converted two more of its actively managed quant funds into ETFs.
The two funds have more than $8 billion assets under management. Meaning their conversion is helping to grow the ETF industry further. DFA is one of the world’s largest mutual fund providers.
DFAX buys companies based outside the US. Companies are chosen using a multifactor approach that looks at value, size and quality (measured by profitability). DFIV tries to buy global value stocks based on proprietary value calculations. Both are actively managed in the traditional sense and don’t reveal the exact specifics of how stocks are bought and sold.
DFA has migrated to the ETF industry thanks to the “ETF Rule” introduced last year. The rule allows non-transparent mutual funds to list as ETFs. DFA have said that their migration to ETFs owes to this rule, but also to the greater tax efficiency that ETFs enjoy.
Thanks to this and other ETF conversions in recent months, DFA is now the 12th-largest ETF issuer in the US, an analysis from ETF.com indicates.
DFIV charges 0.35%, while DFAX charges 0.31%.
Bernie’s commentary – ETF tax advantages are being questioned by the senate
DFA is one of the biggest names in the mutual fund industry. So it is curious to see they’ve moved over to ETFs at all. But given they have, it is interesting that their stated motivation is tax treatment.
Mutual fund managers have said that ETFs hold two advantages, which they sometimes claim are unfair. The first is tax. ETFs in the United States (but not in Europe, where taxation is different) do not pay taxes when they buy and sell shares (creation redemption) because under US law the trading occurs “in kind” and outside the fund (via market makers and APs).
The second they believe is trading on exchange. Having a fund trade on exchange is a powerful thing as it makes it more accessible. Anyone with a brokerage account can come and go as they like. Whereas buying and selling mutual funds off-market can be slower and come with minimums and more paperwork. The ETF rule has worked to level the playing field here.
But what interesting about the tax advantage, and DFA’s stated reason for becoming an ETF issuer, is that is maybe short term. According to a news article Bloomberg published yesterday, the ETF industry is at risk of losing its tax advantages. The US senate is considering getting rid of them. The story reads:
“Draft legislation released by Senate Finance Committee Chairman Ron Wyden of Oregon on Friday featured a repeal of a key tax advantage for the $6.8 trillion U.S. exchange-traded fund industry. The move was tucked in along with a series of proposals to tighten tax reporting requirements around business partnerships, and wasn’t highlighted in Wyden’s accompanying press release.”
For anyone interested, more information is here.