Recently, Dimensional Fund Advisors (DFA) announced that they would be converting several existing mutual funds to exchange traded funds (ETFs), and we wanted to share important information about the conversion. This is their second conversion of existing funds to ETFs. The first successful conversion took place this May.
The funds impacted by this change are listed below:
Fund Objectives Will Not Change
It is important to note that the investment objectives of these funds will not be changing. DFA believes the conversion to an ETF structure will be a benefit to shareholders through potentially greater tax efficiency, which is complementary to the investment objective of the tax-managed funds that are designed to maximize after-tax returns. The funds will also have a lower expense ratio post-conversion (a reduction of 27% on average).
Tax Consequences of Conversion
The conversion from mutual funds to ETFs will be organized as a tax-free event for US tax purposes so we anticipate no taxes related to the conversion of full shares. There may be some cases where fractional shares are held in the mutual fund and, at the current time, ETF shares are not issued in fractional shares. In this case, mutual fund shares will be redeemed and paid out which may result in a very small taxable event. For example, if a fractional share of $25 was held and redeemed, the relevant tax rate would be applied to the capital gain portion of this single fractional share resulting in total taxes paid of less than $25.
Timeline of Conversion
We are closely reviewing this conversion and there is no action required on your part; however, we wanted to ensure you had notice of this change as you may be receiving information from your custodian (TD Ameritrade or Charles Schwab). You will see activity in your account on Friday September 10, 2021, which will be the conversion of the fund holding to its new ETF structure. This conversion will be complete, and the ETFs will begin trading on Monday, September 13, 2021.
We welcome continued innovation and rethinking of best practices by the companies charged with the important task of managing DHG Wealth Advisors’ client assets. We believe this is a prudent step that DFA has taken with the benefits being passed along to our end clients that hold these funds.
Please reach out to your advisory team if you have any questions regarding this conversion or you can visit Dimensional’s Tax-Managed Conversion information page for updates and additional details.
The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.