Dimensional Launches First Active ETF Share Class

It’s spring in the northern hemisphere, which means the birds are singing, the bees are buzzing and the first ETF share class of an active mutual fund has emerged from its cocoon. 

Dimensional Fund Advisors has become the first company to bring an ETF share class to market under new exemptions granted by the Securities and Exchange Commission, giving the treatment to its first mutual fund, the US Micro Cap Portfolio, which launched in 1981. But choosing the company’s original fund for a first-ever ETF share class isn’t merely symbolic, said Joel Schneider, Dimensional’s deputy head of portfolio management for North America.

“It’s extremely relevant right now. This fund was actually designed for institutional investors who were concerned that they had too much concentration in US large caps,” he said. “That was 45 years ago, and history repeats itself.”

One More Time

Dimensional has broad plans to add ETF share classes of its mutual funds, as well as mutual fund shares of ETFs. Like other asset managers, Dimensional for years has had similar strategies in each category. Whether the firm will add share classes to such funds and scrap the separate ETF or mutual fund is one of the questions it’s grappling with, Schneider said. “It’s too early to say what we’ll do,” he said. “But we will take a big picture approach to get as much benefit from these structures for the end client as possible.” There are benefits both ways, as mutual fund shareholders can get better transaction costs and tax efficiency from an added ETF share class, and ETF shareholders could have more efficient rebalancing with mutual fund cash flows, the company said in an announcement.

In the meantime, it’s likely that Dimensional will prioritize the dual-share-class treatment for mutual funds that don’t already have a corresponding ETF, and vice versa, Schneider said. It recently filed for 13 US equity fund ETF share classes with the SEC, and it is also preparing some mutual fund share classes of its ETFs. Though it is the first to offer an ETF share class of an actively managed mutual fund, it’s not the first to dabble in dual share classes:

• Vanguard for years had a patent on dual share classes and until recently was the only firm to offer them, though that was limited to passively managed strategies.
• F/m Investments last month became the first to add a mutual fund share class to an existing ETF, its US Treasury 3 Month Bill ETF (TBIL).
• Many other asset managers have won the regulatory greenlight to add dual share classes, though rollouts are expected to happen gradually, as not all companies have capabilities spanning mutual funds and ETFs.

All the Small Things: The nearly $7 billion US Micro Cap Portfolio has a 1% overlap with the S&P 500, which can make it appealing for investors looking to diversify beyond US large cap stocks, Schneider said. The fund has a performance history of returning nearly 1.5% more annually than its benchmark, but the tax efficiency is also a draw for ETF investors, he said. The tax cost of the fund, or the pretax return minus post-tax return, was 29 basis points in 2024, he said. “That’s a big deal,” he said. “It’s not just about the gains, it’s about the nature of income that the funds are giving out.”