A Systematic Approach Could Help ETF Investors More Efficiently Access the Markets

Retail investors can now access systematic exchange traded fund solutions backed by Dimensional Fund Advisors’ time-tested investment approach.

In the recent webcast, Why Systematic Active Over Either Active or Passive, Gerard O’Reilly, co-CEO and CIO of Dimensional Fund Advisors, explained that Dimension’s ETF strategies are broadly diversified, have low turnover, and are transparent. Its strategies systematically target higher expected returns using information in prices and use flexibility in implementation to maintain focus and limit costs each day.

Dimensional Fund Advisors strategies have stood out in the actively managed investment space. Over the past two decades, only 16% of U.S.-domiciled equity and fixed income mutual funds have outperformed their benchmarks, and only 42% have survived over the 20-year period. On the other hand, all of Dimensional Fund Advisors’ strategies have weathered the various storms, and 79% of their funds have outperformed over the same period.

Dimensional’s staying power may be traced back to their methodology that targets improving expected returns through daily rebalancing. Their strategy focuses on long-term eligibility with size, value, and profitability positioning, along with security, sector, and country weight considerations. Short-term considerations include investment outlook, momentum, securities lending practices, and corporate actions. Lastly, they also consider intra-day costs like expected liquidity and explicit transaction costs. While all of these various factors may save a basis point here or there, they will all add up together and help the end investors save more money and generate higher returns over time.

For example, Dimensional Fund Advisors’ securities lending practices have helped generate improved returns over their peers and helped pad the performance of their fund strategies over time.

Dimensional ETFs recently expanded their lineup with four new strategies, including the Dimensional US Equity ETF (NYSE Arca: DFUS), the Dimensional US Core Equity 2 ETF (NYSE Arca: DFAC), the Dimensional US Small Cap ETF (NYSE Arca: DFAS), and the Dimensional US Targeted Value ETF (NYSE Arca: DFAT).

The ETFs were part of the firm’s plan to convert tax-managed mutual funds into ETFs, which offer investors an additional tool to manage capital gains, supporting the funds’ goal of delivering higher after-tax returns by minimizing tax impact.

Dimensional is one of the first asset managers to convert mutual funds into ETFs. With the successful launch of the firm’s first three ETFs and the conversion of these four mutual funds, Dimensional becomes one of the largest active ETF issuers in the industry, with more than $30 billion in combined ETF assets under management, placing the firm in the top 10% of all ETF issuers across both active and passive offerings.

The ETF investment vehicle also provides a more tax-efficient approach to accessing the various markets. Dimensional takes on a multifaceted approach to improve tax efficiency. They use a daily implementation process to delay purchase or sales around dividends to increase qualified dividend income. Short-term capital gains are managed through tax-advantaged lot selection methodology and delay realization of short-term capital gains through flexible implementation and low turnover portfolio designs. Long-term capital gains are managed through flexible daily implementation to delay realization of capital gains, using cash flows for efficient rebalancing, along with in-kind redemptions to allow for the fund to delay realization of capital gains.

Looking ahead, O’Reilly highlighted a suite of four new ETF offerings that Dimensional plans to launch late 2021 to help fixed-income investors better access the bond markets.

Financial advisors who are interested in learning more about Dimensional’s time-tested investment approach can watch the webcast here on demand.