In the financial world, Dimensional Fund Advisors has something of a mystique around it. Just ask Michael Simmons.
When the Denver-based financial planner was brought to Santa Monica for one of the firm’s famous two-day training sessions, “It’s much like being invited into Willy Wonka’s chocolate factory,” says Simmons, of Transitions Wealth Management. “Because you really do have to be invited.
“I suppose that means I was lucky enough to have a golden ticket.”
In that session the David Booth-founded firm rolled out money legends like Nobel Prize-winner Eugene Fama and his collaborator Ken French, and schooled advisors in their unique factor-based investing philosophy, which tilts toward elements like value and profitability. In fact only approved advisors were allowed to sell DFA products, which gave the firm its exclusive air.
Now, though, DFA is stepping gingerly into a new era. Kind of like Willy Wonka throwing open the factory doors, Dimensional has rolled out its first exchange-traded funds. That means instead of being available only to investors who were able to hire a DFA-approved financial adviser, anyone can buy them. The first two off the assembly line are US Core Equity (DFAU) and International Core Equity (DFAI), just launched in mid-November.
The move is a nod to current market realities. ETFs have gobbled up a large portion of investor assets, with their low cost and ease of use appealing to individuals and institutions alike — so much so, that it has become rare for fund shops not to offer them. DFAU, for instance, boasts a tiny expense ratio of 0.12%.
“They check all the boxes for us,” says co-CEO Dave Butler, a 25-year veteran of the firm who was once drafted by the Boston Celtics. “They are great for clients, they are another tool for advisors, and they are a way for us to add value in the ETF space. So it’s an exciting time around the firm, and we think they’re going to be a big deal.”
The products are still fresh off the lot but seem to be exceeding firm expectations thus far. Together DFAU and DFAI garnered $130 million in assets within the first week. Emerging Core Equity (DFAE) joined the group at the beginning of December, and six more are scheduled for the first half of 2021.
DFA to Offer ETFs
Typically, a launch of ETFs might not be that newsworthy — but the fact that DFA is behind them has raised some eyebrows. “There used to be a lot of obstacles to get access to their funds,” says Dan Sotiroff, an analyst in passive strategies at Chicago-based fund research firm Morningstar. “You had to go through an approved advisor, who had been through their training camp, or you had to be an institution.
“They didn’t want people trading in and out of their funds all the time, which increased turnover and costs, so they were closed off intentionally. So this is a little surprising.”
What prompted the move: The emergence of so-called “active transparent” ETFs, which allowed DFA to apply its particular investing style. ETFs that simply track indexes are a dime a dozen, but with an active model, DFA could tilt its products towards elements it identifies as generating superior long-term returns: Factors like attractive valuation and high profitability.
In recent years, that value theme has required patience from investors. Growth investing has outperformed value almost uninterrupted since 2007 — so long, that some market observers wonder whether value will ever came back into vogue.
The firm’s US Core Equity 1 (DFEOX) and its $25 billion in assets gets a silver analyst rating from Morningstar, with five-year average returns of roughly 10%. Meanwhile its International Core Equity (DFIEX) gets a similar rating, and five-year annualized returns of 3.33%.
“I wouldn’t say it’s frustrating, but it has been unexpected,” says Butler. “Over long time periods, value outperforms growth. But there are going to be months, or quarters, or years where that outperformance doesn’t show up. Clients have to minimize their frustration and emotion, and stay in the market, which will give them a much better chance for great outcomes.”
Of course, most retail investors are not skilled at managing their emotions. It’s human nature to chase hot returns, and sell low and buy high — the precise opposite of what we should be doing. That helps explain DFAs’ fund flows, which have suffered recently as hot growth stocks have been in the driver’s seat.
“Flows have not been going in a good direction for them,” says Morningstar’s Sotiroff. “Starting in mid-2019, they started seeing pretty persistent outflows, with billions of dollars leaving. So they have had to step their game up, be more competitive, and open up to a broader audience through ETFs.”
Another potential trigger for the ETF move: Increased competition from Avantis Investors, a unit of fund behemoth American Century. Previously DFA didn’t have a whole lot of competitors in the smaller-cap, value-oriented space — but with Avantis deploying similar factor-based strategies, this ETF rollout could be seen as defense of its traditional territory.
One intriguing issue is how financial advisors will respond to Dimensional products being so readily available to the public. On the one hand, the move lets advisors better customize client portfolios, providing DFA products in a number of different wrappers; on the other hand, that special advisor relationship doesn’t seem quite so exclusive anymore.
“There might be some advisors viewing the ETFs as a negative because it removes the need for an advisor to access DFA funds,” says Peter Lazaroff, chief investment officer with Plancorp in St. Louis, MO. “But we don’t view it that way at all.”
It will also be interesting to see how retail investors use these ETFs. In the past, Dimensional’s long-term focus was drilled into its legions of advisors, and then subsequently passed on to clients. But with ETFs they have given up a certain element of control, and investors can move in and out as often as they please.
Moreover, in an era when many retail investors seem to be piling into disruptive tech companies with sky-high valuations, a more sober, long-term vision could be a challenging sell.
“I have all the confidence in the world that Dimensional will be able to execute these well,” says Sotiroff, noting that the firm has already been managing ETFs for John Hancock. “The bigger question is the appetite in the market, which will help determine the success of these funds. That remains to be seen.”