iStock_000018683493_Small.jpg

Blog

Dimensional Fund Advisors Offers New ETF Options for Tax-Efficient Investing

If you follow financial news, you may have read one of the many articles detailing plans by Dimensional Fund Advisors (DFA) to launch six new actively managed, tax-efficient exchange-traded funds (ETFs), and convert six of its mutual funds to ETFs in 2021. That’s in addition to two new ETFs that debuted last month, the Dimensional U.S. Core Equity Market ETF (NYSE Arca: DFAU) and Dimensional International Core Equity Market ETF (NYSE Arca: DFAI) and the Dimensional Emerging Core Equity Market ETF (NYSE Arca: DFAE) earlier this month. DFA’s flurry of ETF activity is in response to the adoption of a new rule by the U.S. Securities and Exchange Commission last September designed to modernize the regulatory framework for ETFs and encourage innovation in the marketplace.

DFA is one of the first asset managers to launch active transparent ETFs under the new SEC rule and will be among the first to convert mutual funds into ETFs in this fashion. The positive news for investors includes a significant reduction ­­— 27%, on average ­­— in management fees, without triggering a tax on capital gains.

The mutual funds that will be converted to ETFs are:

Existing Mutual Fund

Current Mgt. Fee (bps)

New ETF

New ETF Mgt. Fee (bps)

% Reduction

Tax-Managed US Equity Portfolio

18

Dimensional US Equity ETF

8

56%

Tax-Managed US Small Cap Portfolio

40

Dimensional US Small Cap ETF

30

25%

Tax-Managed US Targeted Value Portfolio

40

Dimensional US Targeted Value ETF

30

25%

TA US Core Equity 2 Portfolio

20

Dimensional US Core Equity 2 ETF

16

20%

Tax-Managed International Value Portfolio

45

Dimensional International Value ETF

30

33%

TA World ex US Core Equity Portfolio

30

Dimensional World ex US Core Equity 2 ETF

25

17%

Schedule an appointment

AMDG Financial clients who hold investments in the soon-to-be-converted funds will not need to take any action, said Wayne Titus, CPA/PFS, AIFA®, AMDG Financial’s founding partner. “The conversion of these funds enables clients to maintain a tax-efficient investing strategy and do it at a lower cost going forward. There’s really no downside.”

The characteristics of Dimensional’s active, transparent ETFs differ from index ETFs (or index mutual funds), which passively track an index. Active ETFs seek to achieve a specified investment objective, using an active investment strategy. The structure enables Dimensional to adjust a portfolio’s holdings each day and implement a daily investment process consistent with the way the company has managed funds for nearly 40 years.

“We’re pleased to broaden our ETF platform in a way that can help investors manage taxes even more efficiently,” Dimensional Co-CEO and Chief Investment Officer Gerard O’Reilly said in the company’s November announcement. “We believe these strategies fill a unique space in the market, providing the benefits of passive investing, including low-cost diversified exposure to stocks, combined with the advantages of active investing, such as higher expected returns, flexible trading, robust daily portfolio management, and risk management,” he added.

“We’ve been interested in ETFs and have been researching them for some time,“ said Titus, ”but because ETFs trade like stocks with price changes throughout the day, offering ETFs on our own would have required some major changes in our internal systems and policies, and more important, a move to ETFs outside this announced conversion could have cost our clients significant dollars in recognized capital gains.. With Dimensional’s expansion into ETFs, our clients will benefit from lower costs and  zero tax implications for this conversion, but also from the value they expect from Dimensional’s research, portfolio design, implementation and trading strategies.”

Learn more about the mechanics of ETFs here, or feel free to contact AMDG Financial with any questions.

Click here to view previous news releases from AMDG Financial.

Subscribe to our blog!