What Dimensional’s Dual-Share-Class Approval Means for Advisors

The SEC approved the first dual share classes of ETFs and mutual funds this week, meaning advisors won’t have to choose between the two wrappers, effectively letting them order the surf and turf.

Dimensional Fund Advisors on Tuesday received the long-awaited exemption, which could become one of the Securities and Exchange Commission’s most significant decisions since the ETF Rule in 2019. Almost 80 other companies, including major asset managers like BlackRock, State Street and JP Morgan, are still waiting in line for the green light. While the eventual benefits of the decision may take years to develop, experts agree it’s a major milestone for the industry that could reshape how financial advisors use the funds inside client portfolios. Plus, nobody likes choosing between the steak or the lobster.

“We anticipate Dimensional will be the first firm to offer an actively managed ETF share class of an existing mutual fund,” said Todd Rosenbluth, head of research and editorial at TMX VettaFi. “Demand for actively managed ETFs has never been stronger.”

Can I Wrap That Up?

For advisors, new products that utilize dual share classes will likely blend the advantages of the ETF wrapper with the scale and reach of traditional mutual funds. They could also help ETFs enter the 401(k) landscape. Dimensional, one of the country’s largest active ETF issuers, can now extend key ETF features to existing mutual funds, like the creation and redemption mechanism that can help boost tax efficiencies. 

Dimensional had applied to add exchange-traded fund share classes to 13 of its US equity funds, according to a release. Some of them include:

• The firm’s flagship strategies such as the US Core Equity 1, US Small Cap Value, Vector Equity and its Real Estate Securities Portfolio.
• Dimensional has 41 ETFs  in total with over $225 billion in assets under management.

Managers still have their work cut out for them, however. The challenges will be navigating the significant back-office reporting issues and ensuring investors fully understand the structure, Rosenbluth added. “Gaining approval for an ETF share class and successfully launching one are two different things,” he said. Dimensional said the first batch of selected funds were the least operationally complex to transition, but additional candidates are expected to follow. “We expect many other asset managers will observe this rollout carefully before adopting a similar approach,” Rosenbluth said.

I’ll Take Two: There will certainly be winners and losers. Historically, the easing of regulations has tended to favor the biggest brand names, said Aniket Ullal, head of ETF Research & Analytics at CFRA Research. For example, after the ETF Rule went into effect, almost 60% of active ETFs assets went to just five issuers, though it could also benefit boutique managers with strong track records. “Mutual fund managers who lack both strong brand recognition and a track record of past performance will likely face a twin threat: downward fee pressure and difficulty in attracting ETF inflows,” he said.