DFA request for ETF share classes marks tipping point for legacy fund companies

investmentnews.com:

Dimensional Fund Advisors’ steady migration into the ETF space could be moving to a new level as the $614 billion asset manager seeks regulatory approval to launch ETF share classes for its U.S. mutual funds, which represent $400 billion.

A popular asset manager with financial advisors, DFA is seeking exemptive relief from the Securities and Exchange Commission to do what Vanguard has been doing for about 20 years.

One major distinction is that the 70 mutual funds for which Vanguard has created ETF share classes to date have all been passive indexed strategies. DFA, hoping to take advantage of an expired Vanguard patent on the ETF share class model, wants to do the same thing with actively managed funds.

“This is another avenue for legacy asset managers to enter the ETF space,” said James Seyffart, ETF analyst with Bloomberg Intelligence.

Seyffart said that from an asset manager’s perspective, an ETF share class is appealing because it addresses many of the challenges legacy asset managers face when confronted with the lopsided flows out of mutual funds and into ETFs.

“If you’re a traditional asset manager with billions in 401(k) plans, where you don’t see a lot of ETFs on the menu, you could offer a share class ETF with the same strategy and track record and assets,” he said. “There are benefits to asset managers and end investors.”

It’s difficult to say whether the SEC will approve the exemptive relief, especially since it denied a similar request from Vanguard in 2015 to offer an ETF share class for active mutual funds. But DFA, in its well-orchestrated filing and presentation, is making the case for why the ETF share class is good for both mutual fund and ETF shareholders.

“We believe our innovative approach to