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DFA Plans Its First Bond ETFs

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What You Need to Know

  • The firm is planning four bond ETFs — two investment-grade bond ETFs, one TIPS ETF and one municipal bond fund.
  • All four ETFs are actively managed and have total operating expenses ranging from 0.11% to 0.19%.
  • In separate news, DFA is also planning to consolidate two tax-managed equity mutual funds.

Dimensional Fund Advisors has filed an application with the Securities and Exchange Commission to launch its first bond ETFs.

They are the Dimensional Investment Grade ETF, Short-Duration Investment Grade ETF, Inflation-Protected Securities ETF and Municipal Bond ETF.

The filing follows the firm’s successful launch of its first actively managed ETFs in November and December — all equity ETFs — and its conversion of four mutual funds to ETFs in June.

All four bond ETFs will be actively managed and will trade on the NYSE Arca exchange, and all but one — the municipal bond ETF — may lend their portfolio securities to generate added income, according to a recent SEC filing.

The total operating expenses of the ETFs range from 0.11% for the Inflation-Protected Securities ETF to 0.19% for the Investment Grade ETF, after a fee waiver that lasts through at least February 2023 but reduces fees by just one basis point. The Short-Duration Investment Grade ETF and Municipal Bond ETF will have fees of 0.18% after the fee waiver.

David Plecha, DFA’s global head of fixed income portfolio manager, and Joseph Kolerich, the firm’s head of fixed income, Americas are listed as portfolio managers for all four ETFs. There’s an additional and different third manager for each of the funds: Lovell D. Shao for the Investment Grade ETF; Lacey Huebel for the Short-Duration ETF, Alan R. Hutchison for the Inflation-Protected Securities ETF and Travis A. Meldau for the Municipal Bond ETF.

The New Bond ETF Portfolios

The Investment Grade ETF and Short-Duration Investment Grade ETFs will invest in a broad portfolio of U.S. and foreign investment grade fixed income securities. The Investment Grade ETF will target securities that mature within 20 years with a weighted average duration within 15 months of the Bloomberg Barclays U.S. Aggregate Bond Index. Its duration was approximately 6.2 years as of Dec. 31, 2020.

The Short-Duration ETF will invest in securities that mature within five years, targeting a weighted average duration within 18 months of the weighted average duration of the ICE BofA 1-5 Year US Corporate & Government Index. The weighted average duration of that index was about 2.7 years as of year-end 2020.

Both the Dimensional Inflation-Protected Securities ETF and Dimensional Municipal Bond ETF will invest primarily in government securities.

The Inflation-Protected ETF will invest at least 80% of its net assets in inflation-protected securities issued by the U.S. government and its agencies and instrumentalities, including Treasury Inflation-Protected Securities (TIPS), with maturities ranging from five to 20 years. Its targeted weighted average duration is similar to its benchmark, the Bloomberg Barclays U.S. TIPS Index, which was approximately 7.77 years as of Dec. 31, 2020.

The Dimensional Municipal Bond ETF will invest primarily in investment-grade municipal securities and focus on providing current income exempt from the federal personal income tax.

Under normal circumstances, the portfolio will generally maintain a dollar-weighted average duration within 18 months of the weighted average duration of the S&P Intermediate Term National AMT-Free Municipal Bond Index. That duration was approximately 3.55 years as of Dec. 31, 2020.

DFA Plans Consolidation and Conversions of Mutual Funds

In related news, DFA has also filed notice with the SEC that the board of directors of DFA Investment Dimensions Group Inc. has approved the reorganization of the Tax-Managed U.S. Marketwide Value Portfolio (DTMMX) into the Tax-Managed U.S. Marketwide Value Portfolio II (DFMVX).

Both portfolios have investment objectives and fundamental investment restrictions that are materially the same, and each invests substantially all its assets in the Tax-Managed U.S. Marketwide Value Series of the DFA Investment Trust Co. Their fees, however, are different — 0.24% for DFMVX compared with 0.37% for DTMMX.

Once the reorganization is completed, shareholders of DTMMX, the target fund, will receive shares of the DFMVX based on the aggregate net asset value of their shares held immediately before the reorganization, and they will enjoy lower fees, according to the SEC filing. As soon as practicable thereafter, the target portfolio will be liquidated and dissolved. DFA expects the reorganization will be completed in the fourth quarter of 2021. It does not require shareholder approval.

DFA is also planning the conversions of its Tax-Managed International Value Portfolio (DTMIX) into the Dimensional International Value ETF (DFIV) and of the TA World ex US Core Equity Portfolio (DFTWX) into the Dimensional World ex U.S. Core Equity ETF (DFAX), on or about Sept. 10, 2021. The conversions will be tax-free events, with shares of the mutual fund exchanged for equal shares of the new ETFs and the fees of the new ETFs will be lower than the fees of their predecessor mutual funds — 0.30% for the new International Value ETF will be 0.30%, down from 0.45%, and 0.25% for the Dimensional World ex U.S. Core Equity ETF will be 0.25% vs. 0.30%.