Dimensional, Allspring Latest Firms to Tack on ETF Share Classes

That’s one classy move.

Since the Securities and Exchange Commission began giving fund companies the green light via exemptions late last year to add ETF share classes of their mutual funds (and vice versa), few have hit the accelerator. The first to do so, Dimensional Fund Advisors, is already shifting gears. The firm is preparing to move a batch of eight standalone exchange-traded funds to ETF share classes of corresponding mutual funds. And another company, Allspring, last week filed with the SEC to add ETF share classes to five existing funds, a first for it.

“We have standalone ETFs, but there are some benefits associated with merging those into the mutual funds,” said Marlena Lee, Dimensional’s global head of investment solutions, noting that the change will result in fees dropping by 9% on a weighted average basis. “The biggest benefit to our investors is the economy of scale.” 

The Tortoise and the Share 

As a whole, the industry has moved slowly in rolling out dual share classes. While dozens of firms have exemptions, only a few, including Dimensional, F/m Investments, Thornburg, Fidelity and Nuveen, have actually added share classes of existing products. Vanguard, of course, long had a patent on the ETF share class and has one for many of its passively managed funds. Much of the reason for the slow adoption is the different settlement processes of ETFs and mutual funds; more than a few asset managers specialize in one type of fund, but not necessarily both. Along with that, the industry has had to figure out how distributors used to getting compensated from fees baked into mutual funds can instead get paid by ETFs.

Some of the recent developments in dual share classes:

• Dimensional will soon merge eight ETFs into share classes, including US Core Equity, Vector Equity, Small Cap Value, High Profitability, Real Estate, Small Cap and Targeted Value ETFs.
• That firm also filed in July for five ETF share classes of fixed income strategies.
• Allspring last week filed for ETF classes for its High Yield Municipal Bond, Large Cap Core, Premier Large Company Growth, Short-Term High Income and Strategic Municipal Bond funds.

Class Action: “Investors shouldn’t have to choose between the investment strategy they want and the vehicle they prefer,” said Rick Genoni, who leads Allspring’s ETF business. The dual-share-class structure “is one strategy with more ways to invest. There are a lot of benefits that come with it. Obviously, not the least of which is the tax efficiency.”