Dimensional to Launch Fixed Income ETFs

Shanny Basar
ETFs to Increasingly Replace Futures

Dimensional Fund Advisors has converted two more US tax-managed mutual funds into active transparent exchange-traded funds adding to its suite of equities ETFs which launched last year. The systematic factor investing asset manager also intends to launch fixed income ETFs this year.

In June last year Dimensional Fund Advisors filed with the US Securities and Exchange Commission to launch three actively managed ETFs, in addition to offering its investment strategies through mutual funds, separate accounts, and commingled trusts, due to client demand and changes in regulation and technology.

Gerard O’Reilly, Dimensional Fund Advisors

Gerard O’Reilly, co-chief executive and and chief investment officer, said in a statement: “Our strategies go beyond the cost efficiency and high diversification of passive indexing. They have the added benefits of daily, flexible implementation, which aim to deliver higher expected returns and support robust risk management.”

On 13 September Dimensional converted two non-US market tax-managed mutual funds, with more than $8bn (€6.7bn) in assets, into ETFs which were listed on the New York Stock Exchange.

In June this year Dimensional converted four tax-managed US mutual funds totaling $29bn to active transparent ETFs, supported by Citi.

With a total of nine listed equity ETFs, Dimensional said in a statement that it is one of the largest active ETF issuers in the industry, with more than $40bn in combined assets under management. The firm also said it aims to launch fixed income ETFs this year.

Nicole Hunter, head of ETF capital markets at Dimensional, told Markets Media: “We’re committed to the ETF space that stands alongside our mutual funds and separately managed accounts offerings. It is big news for us to get beyond $40bn and we are going into a different asset class to give advisors the full suite needed for  proper asset allocations, I’m really excited.”

Hunter joined Dimensional Fund Advisors in October last year to grow the firm’s suite of ETFs and to monitor primary markets activity, as well as provide client support and lead engagement with Authorized Participants.

Previously Hunter led many facets of BlackRock’s iShares business, including as head of US iShares broker and exchange business development. Prior to joining Dimensional, Hunter had been independently advising asset managers, service providers, and institutional investors on capital market strategies, product development, risk oversight, manager due diligence, and trading.

She explained that Dimensional had been one of her consulting clients and she was attracted to way the asset manager wanted to enter the ETF space.

“Dimensional refused to get into ETFs unless they could do it by implementing their systematic investing philosophy,” she said. “An ETF rule that passed allows us the flexibility to bring the full Dimensional approach into the structure and that was compelling to me.”

Dimensional also had more than five years of experience managing ETFs through subadvisory relationships, so it had an ETF team within its portfolio management group as well as experience managing ETFs.

Nicole Hunter, Dimensional Fund Advisors

“One of the other reasons I was really excited to join the firm was that it was very easy for me to come in and hit the ground running,” Hunter said. “What was new in our approach was the ETF wrapper, but one of the reasons we are very comfortable being a top-tier player is that we are not new to ETF infrastructure.”

She continued that many ETFs are passive and must follow a strict schedule for rebalancing, while Dimensional funds are actively managed and follow an innovative daily management process. Fully transparent ETFs (like Dimensional’s) have to disclose their holdings on a daily basis but Hunter argued that with active ETFs she has the best of both worlds.

“We are so broad in our portfolios, and we do a little trading every day, so we are not worried about being fully transparent with our holdings,” she added. “For our strategies, clients get all the efficiency of the ETFs being transparent with that smart active side of managing money on a daily basis.”

Two core equity market ETFs were launched in November and a third in December, and they have reached an aggregate assets under management of more than $2bn.

Dimensional investment strategies seek to harness a consistent, broadly diversified, and systematic approach that aims to outperform the market without outguessing the market. Strategies within Dimensional’s suite of ETFs have varying tilts from market weights to securities that offer higher expected returns, such as small cap, value, and high profitability securities.

“It is very rare for new ETFs to reach $1bn within a year which tells me they solved a problem and provided value to our advisory community,” Hunter said.

Hunter continued that Dimensional is in discussions with clients about potential environmental, social and governance ETFs, but the firm needs to be able to provide the right exposure.

“ESG is definitely something that we are looking at and I would assume that every asset manager is doing the same,” she added.

In a year Hunter would like Dimensional to have a full suite of ETF offerings that bring the best of the firm’s investing to clients so they have more options to build portfolios.

“We’re going to make sure we dot our I’s and cross our T’s and do it right, but in a year from now I would love to have a more robust offering,” she added.

Active ETFs

There were record assets and net inflows in active ETFs and ETPs worldwide at the end of July this year according to ETFGI, an independent research and consultancy firm.

In the first seven months of this year record net inflows of $88.2bn were more than double the prior high of $35.2bn gathered in the same period last year. The year-to-date inflows were just $3bn below the full year 2020 record of $91.1bn for active ETFs.

Assets invested in active ETFs and ETPs finished July at a record $404bn, according to ETFGI.

Equities gathered net inflows of of $40.2bn to July with fixed Income at $37.6bn, nearly double the $20bn in net inflows that fixed income products attracted through July 2020.

ETFGI said substantial inflows can be attributed to the top 20 active ETFs/ETPs by net new assets, which collectively gathered $4.7bn during July.

JPMorgan Equity Premium Income ETF gathered  the largest net inflows of $809m in July, while Dimensional US Core Equity Market ETF was seventeenth with net inflows of $109m during the month.

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