A New Chapter for Investing: What the SEC's Approval of Dimensional's ETF Share Class Means for You

The US Securities and Exchange Commission (SEC) has issued a public notice that it intends to approve Dimensional Fund Advisor’s (DFA) exemptive relief application to offer both exchange-traded fund (ETF) and mutual fund share classes. This marks a significant development for the investment industry and, more importantly, for investors like you who work with financial advisors.

What is the Share Class Structure and What are the Benefits?

This structure, pioneered by Vanguard, would allow a single investment portfolio to offer both a mutual fund share class and an ETF share class. This isn't just a technical change; it's a move designed to enhance efficiency and provide more options.

According to Dimensional, the largest active ETF issuer in the US, this structure offers several key benefits:

For Mutual Fund Investors: You could benefit from lower transaction costs and greater tax efficiency.
For ETF Investors: You could benefit from more efficient rebalancing using mutual fund cash flows and lower total portfolio transaction costs.
For All Investors: The structure provides economies of scale, passing on benefits of a well-established fund like broad diversification, reduced expenses, and increased securities lending revenue.

DFA: A History of Putting Investors First

Dimensional has been advocating for the benefits of this share class structure since filing its exemptive relief application in July 2023. Gerard O’Reilly, Dimensional’s Co-CEO and Co-Chief Investment Officer, expressed his gratitude for the "positive, collaborative interactions" with the SEC staff. He stated, "The share class structure offers significant benefits in cost efficiencies, tax management, and greater choice for both mutual fund and ETF investors, and we look forward to seeing these efforts manifest in real-world solutions to better serve investor needs".

DFA's Legacy of Innovation

For more than 40 years, Dimensional has worked alongside financial professionals with a shared goal of helping investors achieve better outcomes. The firm began offering low-cost systematic strategies to institutions in 1981 and has consistently supported a move toward more investor-centric independent advice.

Dave Butler, Co-Chief Executive Officer, noted that "broadening access to ETF share classes represents a meaningful evolution—one that enhances flexibility and supports more-tailored client solutions". Dimensional’s actively managed strategies go beyond traditional indexing by using a flexible, daily approach to implementation while retaining many of the benefits of passive investing, including low fees and broad diversification.

Dimensional launched its first ETFs in November 2020, following the SEC’s “ETF Rule” (Rule 6c-11), which allowed the firm to bring its refined investment process to ETFs for the first time. The firm continues to build its suite of 41 ETFs, which now have over $220 billion in AUM, alongside its mutual fund and separately-managed-account offerings. This SEC notice is a testament to that continued evolution.

Ark Royal's Long Association with Dimensional Fund Advisors (DFA)

Ark Royal founder Mike Palmer's conviction in DFA solutions predates Ark Royal. In 2003 while at another firm, Mike led the effort to transition that firm's investment offering to the more robust, comprehensive and evidence-based investment offering Dimensional Fund Advisors provided. "It helped transform that firm, and more importantly, deliver an exceptional investment experience for clients - many of whom I'm still working with today more than twenty years later," said Palmer. "I remember being blown away at my first DFA Foundations conference in Chicago in 2003. I continue to be impressed by DFA's intellect and their commitment to doing right by the client. Those traits are in the company's DNA."

The exact details on the logistics involved in the transtion for existing holders of DFA mutual funds will be worked out over the coming months with our custodians. The good news is the heavy lifting of getting regulatory approval is behind us and our clients will soon enjoy the improved tax efficiencies the ETF structure offers.