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Why Dimensional Fund Advisors Is Converting Six of Its Mutual Funds to the ETF Format


The mutual fund industry's migration into the ETF wrapper is officially underway.

Dimensional Fund Advisors launched two new ETFs on Nov. 18, the first step in its plan to shift a number of its strategies into the ETF format by the end of 2021.

The Dimensional US Core Equity Market ETF (DFAU) and Dimensional International Core Equity Market ETF (DFAI) are respectively up nearly 2% and about 1% since launch. They are transparent and actively managed. Each has upwards of 2,000 stocks in its portfolio.

"Those ETFs ... combine all the expertise and knowledge that we've accumulated over the past 40 years when managing equities," Dimensional Fund Advisors co-CEO and Chief Investment Officer Gerard O'Reilly told CNBC's "ETF Edge" on Monday.

Dimensional plans to launch a third, emerging markets focused actively managed ETF this Wednesday. The firm also hopes to convert six of its tax-managed mutual funds into ETFs before the end of next year. The mutual fund-to-ETF conversion will be an industry first.

Like Dimensional's other funds, DFAU and DFAI invest in large- and small-cap names in the interest of diversification, O'Reilly said.

"The big names that you'll be familiar with in the marketplace are held inside this strategy along with many thousands of other names ... with an overweight to small, value and high profitability," he said.

DFAU's top five holdings are Apple, Microsoft, Amazon, Alphabet and Facebook. DFAI's are Nestle, Roche, Novartis, LVMH and Toyota.

"It's been a good month for small value, outpacing large growth by 10 to 15 percentage points," O'Reilly added.

November was the best month on record for the previously lagging value trade and the resurging small caps.

"What's new and unique about these ETFs is they're launched as active transparent ETFs, which mean they have a lot of the benefits of indexing — low cost, low turnover, highly diversified — but then we have an active implementation that helps manage risk and keep us focused on those stocks with higher expected returns day in, day out," O'Reilly said.

The mutual funds that Dimensional plans to convert into ETFs will share in that philosophy, O'Reilly said, adding that financial professionals have been requesting that the firm transfer its strategies into the ETF wrapper "for a couple of years."

And while mutual funds and ETFs will likely "have a very successful year in 2021," the value trade's prospects improve with every uptick, O'Reilly said.

"When you look back at U.S. data over the past, let's call it, 100 years, we see that value stocks have on average outperformed growth stocks by about 3-4% a year, and in years when they have outperformed, that level of outperformance has been on the order of 10-15%," he said. "So, it's not uncommon to see months, quarters, years where value outpaces growth by wide margins and that's just what we saw in November."

DFAU was up just over 1% in early Tuesday trading. DFAI climbed nearly 2%.


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