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Exciting Developments at Dimensional

In late 2020, Dimensional Fund Advisors, introduced exchange-traded funds (ETFs) complementing their existing suite of mutual funds. In September 2019, the US Securities and Exchange Commission (the SEC) adopted a new ruling (Rule 6c-11) which streamlines regulations concerning ETFs, allowing for greater flexibility in ETF management. Along with this improved flexibility, Dimensional will apply its consistent investment philosophy of providing low-cost, broadly diversified investment solutions aimed at pursuing higher expected returns across all of its investment vehicles.

Before we dive deeper into Dimensional’s ETF lineup, let’s take a closer look at ETFs themselves. Introduced to the investor market in 1993, an ETF is a collection of securities, such as stocks, that can hold hundreds or thousands of companies across various industries and sectors, which is very similar to a mutual fund. However, ETFs are listed on exchanges and can be traded throughout the day like individual company stocks. This is unlike a mutual fund that is traded and priced only once a day after market close. (Source: www.investopedia.com)

 

Benefits of ETFs include:

  • Tax efficiency– ETFs have greater control over the realization of capital gains to shareholders to help defer taxes. ­­This can make ETFs optimal investment choices for non-retirement accounts.
  • Low cost– Most ETFs, including Dimensional’s, incur $0 transaction fees at custodians like TD Ameritrade & Charles Schwab.
  • Intra-day trading– ETFs can be redeemed in the middle of the marketing trading day (as mentioned above).

It is important to remember that ETFs and mutual funds can each serve different purposes depending on the investor. Mutual funds can avoid some of the trading costs inherent of ETFs including bid/ask spreads and market impact. For the long-term investor, mutual funds continue to serve their purpose, especially in retirement accounts, as these funds are typically not traded often and can therefore avoid the volatile price swings that can occur with ETF trading.

Further, in Q1/Q2 of 2021, Dimensional will be converting their tax-managed/tax-advantaged mutual funds to ETFs. Below is a list of the funds that will be converted:

(Source: www.dimensional.com)

Regarding this conversion, it is important to note the following:

  •  If your portfolio holds these funds, the conversion will not create a taxable event.
  • The ETFs being introduced are also expected to have, on average, a 27% reduction in expenses (fund management fee/expense ratio) when compared to the mutual funds being replaced. For example, as illustrated in the table, the Dimensional Tax-Managed US Small Cap fund (ticker: DFTSX) with an expense ratio of 40 basis points (or 0.40%) will be converted to the US Small Cap ETF (ticker: DFAS) with an expense ratio of 30 basis points (or 0.30%).
  • No action is needed on your part as your financial advisor will continue to monitor the expected time frame of the conversion.  

Last, but certainly not least, in late 2020, Dimensional announced a fee reduction across 33 of its equity (stock) mutual funds that will go into effect February 28th, 2021. A full list of mutual funds and their respective reductions can be found here. 

We are excited about these investment enhancements that our clients will benefit from. If you hold any of these investments in your portfolio, you will receive additional communication regarding the fund conversion. In the meantime, please feel free to reach out to your financial advisor with any questions.

(Contributions to this article were made by Jordan Naffa, LUTCF®, AJ Flores, CFP®, Devin Watts CFP®, & Tina Mistry, CFP®)

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