Since launching its first ETFs in 2020, Dimensional Fund Advisors has enjoyed its position as one of the fastest growing ETF issuers in the industry.
Joel Schneider, deputy head of Portfolio Management and one of a team of three that oversees all the vehicle types in equities for the firm in the US, says that the firm’s popularity lies in the fact that they only launch products based upon client demand.
“We wait for enough clients to say they have a specific need,” he says. The firm has just sailed past USD200 billion in active ETF assets, with USD180 billion in equity products and USD20 billion in fixed income.
Flows are strong too, with every single one of the firm’s 41 ETFs capturing positive net inflows year to date. Schneider says that, over the last 20 years, 84 per cent of Dimensional’s funds have outperformed their benchmark indexes against an industry average of under 17 per cent.
“And our strategies survive,” Schneider says. “We haven’t closed any of the funds we offered 20 years ago and more than half of all mutual funds in the US have closed over that time. This goes back to the fact that we wait until our clients tell us they have a specific need, and we build something to address that need.”
“We offer solutions that people can use to build long term asset allocations, not funds purely based on recent trends.”
Schneider defines active ETFs as funds designed to beat their benchmark index, and the firm has recognised that there is a spectrum of risk that investors can tolerate.
“Some of our clients are happy to take more deviation from the market and others want less.”
To address demand, Dimensional introduced a new strategy type with a lower tracking error – the Market Series – that takes lighter tilts towards stocks with higher expected returns. “These funds can have 50 to100 bps of tracking error rather than 2 to 4 per cent, and investors often use them to replace their index ETFs,” Schneider says.
“Today we have something like USD40 billion in our Market Series ETFs, investing in the US, developed international, and emerging markets, and clients both on the adviser and the institutional side are moving into those strategies rather than index funds.”
Schneider says launching ETFs has allowed Dimensional to give lots of different clients, with preferences for different vehicles, access to the same investment strategy.
“The benefit is that we have different clients across different channels. It’s good for us and good for them. Clients didn’t love needing to make a trade-off between getting the investment strategy they wanted and the wrapper they wanted. This is a cool thing for the industry, flipping the paradigm from vehicle-first decisions to strategy-first decisions.”
Dimensional has been a leader in the application for exemptive relief for the new, long awaited, ETF as a share class regulation. “We are optimistic and over 60 investment managers have submitted applications now.”
The firm is also working to launch its first UCITS ETFs, expected later in the year.
“We have built out the infrastructure and the team,” Schneider says. The new products will be very similar to the products the firm offers now, with slight geographical tweaks. The firm has also launched ETF share classes in Australia in a co-mingled portfolio, which allows investors to come into the funds through a trust or an ETF.
The slew of ETF launches that come through every week are interesting to Schneider, but he is more interested to see how many ETFs across the industry will withstand the test of time. “They may be around for a few years, but ours will last because they are based on the underlying investment strategies that we already run,” he says. “Due diligence has just gotten more difficult. Everyone is launching a bunch of stuff and it’s not clear how much of that will stay around and be able to outperform.”
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