On Friday, Dimensional Fund Advisors filed to launch three actively-managed ETFs. These new products are versions of its core equity strategy (focused on the U.S., foreign developed markets, and emerging markets, respectively) that offer broad exposure to the market and adjust their holdings' weightings to favor stocks with lower valuations, smaller size, and higher profitability.

This marks Dimensional's entry into the ETF business. (It previously developed indexes that John Hancock ETFs track, but never directly offered ETFs.) This is a significant milestone for the firm, partially because investors won't need to go through an approved advisor to access the firm's ETFs. Dimensional put that requirement in place to mitigate short-term trading in its funds and partner with investors who subscribe to the firm's core investment philosophy.

My colleagues and I had a chance to speak with Gerard O'Reilly today, one of the firm's Co-CEOs. He said he is less concerned about short-term trading in the ETFs, since the ETF structure largely externalizes those costs. 

The timing of the firm's decision to launch ETFs is partially driven by commercial considerations. While the firm has enjoyed strong inflows for the better part of the past decade, flows turned negative over the past twelve months. Indeed, O'Reilly acknowledged that clients are increasingly asking for ETFs. However, he also cited the ETF Rule as a consideration influencing the timing of this decision. The ETF Rule allows all ETF providers to use custom creation and redemption baskets, which can reduce transaction costs and improve tax efficiency. 

The firm doesn't expect to change its distribution strategy or focus on institutional investors and financial advisors.  

Dimensional is slow to the ETF party, but its entry should benefit investors by allowing more people to access the firm's strategies and do so in a more tax efficient way. 

Best,

Alex