SEC Intends to Allow Dimensional to Offer Dual Share Class Funds

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00:00What does this say about the other 70 applications that are before the SEC and trying to adopt the dual class structure?

00:08Does this open the door for all of that as well?

00:11So to begin, I think it's good to recognize that we're very, very excited about this development.

00:16At Dimensional, we always talk about the three rights.

00:19Do the right thing, do it the right way, do it right now.

00:21And we think this is a good move by the SEC for the end investor.

00:25We think that it can increase tax efficiency, it can lower transaction costs, can increase investor choice.

00:31So lots of good things in here for the end investor.

00:34What happens to the industry at large, I think that remains to be seen.

00:38And given that there's a lot of good things in here for the end investor,

00:42I expect many other firms will follow what Dimensional has done,

00:46may file for exemptive relief and use our application as a template for that

00:51and hope to gain, you know, approval from the SEC themselves.

00:56But I think it's always good to keep the end investor in mind.

00:58And we think this is a good day for the end investor.

01:01Well, Gerard, bring us behind the curtain a little bit,

01:03because I believe that Dimensional just filed an amendment to your application on Friday.

01:07You were one of the first out the gate with these exemptive relief requests all the way back in July 2023.

01:13What ultimately got the SEC over the line here when it comes to actually giving the green light,

01:19or at least intending to give the green light?

01:22Yeah, you know, it's been a collaborative conversation with the SEC over the past two years

01:27in terms of us explaining what we believe the benefits are to the end investor of the ETF share class

01:33in the way that we've proposed it in our exemptive relief.

01:36Them sharing any of their concerns and us kind of working with them to address what those concerns may be.

01:42There were some kind of key changes in the filing on Friday, the amendment on Friday,

01:48that covered things around how X dates around distributions and so on.

01:52So it was kind of a small modification to what had been previously filed.

01:56And I think that was the last concern that we had heard from the SEC addressed.

02:01And so once all the concerns were addressed, they moved forward pretty rapidly as this SEC is doing.

02:05So we're pleased that they made that move this morning.

02:09So let me just, for everybody watching,

02:11the reason this is a big deal is because there's about $4 or $5 trillion in mutual funds

02:16that are about to be able to bolt an ETF share class right into them.

02:21Now, Gerard, if you could tell me how this will work.

02:24If I'm in a DFA mutual fund, will I now be able to switch over to an ETF if I prefer that vehicle

02:30without having to pay capital gains distributions or any taxes?

02:34Is that generally the benefit here to the mutual fund holders?

02:37So there's a few different benefits, but we've been working on this, Eric, for a while now.

02:42And so we've been working with the various custodians, the state streets, the cities,

02:47the transfer agents and so on.

02:48So we've been working on the operational features of this for quite some time.

02:51What you can expect from Dimensional is that in the near future, we expect to file amendments

02:57to the registration statements for a number of existing mutual funds.

03:02And what we hope to be able to accomplish then is early in the new year,

03:05so in the first quarter of next year, have ETF share classes available in the marketplace.

03:11So that's what our expectation is.

03:12We've been ready to go.

03:13We've been waiting and working with the SEC so that we expect to have this in the marketplace early in the new year.

03:19The way that the exemptive relief has been written, and as we expect it to be granted,

03:24it means that investors in the mutual fund have the potential to do a tax-free conversion

03:31into an ETF share class for where the ETF share class exists.

03:34So that is one benefit, I think, for investors in the mutual fund.

03:38The other benefit, of course, for investors in both the mutual fund and the ETF share class

03:41is combining both of those access points.

03:44And that second access point gives you another way to manage the strategy,

03:48which our way of investing is well-suited to using that.

03:53So I'll give you an example, Eric.

03:55ETFs do create and redeems every day.

03:57In 2024, 30% of the turnover in our ETF suite was done through standard create and redeems.

04:03That additional flexibility now can be brought to the mutual fund shareholders on day one

04:07once we have those ETF share classes available.

04:10So that's the way that we're approaching it.

04:12We think that there's lots of benefits here, and to your point, we hope to give that additional

04:16choice to the investors in the mutual funds early in the new year.

04:18All right.

04:19Thank you for explaining all of that, Gerard.

04:22Once the SEC moves forward with actual approval and grants you that permission,

04:27how quickly will you actually use the structure?

04:31I expect within about three months.

04:33So we're ready to go.

04:35And so typically what has to happen is that you file an amendment to the registration statements,

04:39which is about 60 days.

04:41So 60 days after you file, those typically go effective.

04:45Then after that, I think that we have all the infrastructure in place that we're ready

04:49to launch ETF share classes of some of our mutual funds.

04:53So if you kind of map out that time frame, I think that, you know, in the first couple of

04:58months of 2026, we hope to have ETF share classes of a number of our mutual funds available

05:03for investors to invest in.

05:05So Gerard, it sounds like you don't expect the SEC to hold a hearing there then, because

05:11taking a look at the order this morning, it said that it will grant these, this exemptive

05:15relief unless the commission orders a hearing.

05:18But on this timeline, it sounds like you're expecting early 2026 to be basically the starting

05:24line.

05:26Yeah, that's our expectation.

05:27It's pretty uncommon for a hearing on this type of application, but we remain flexible.

05:32But that's our expectation.

05:33Yeah, we think that we'll be first in the market, I suppose, which is a good thing for

05:40the investors in our funds, because we've been in communication with the financial professionals

05:44that kind of advise families all over the U.S. in what funds to invest in.

05:48And we know this is an important development for them, an important addition of our fund

05:53complex for them.

05:54So we've been working with them for a while, working with the service providers, working

05:58with the SEC.

05:58A lot of planning has gone into this moment, and we're very much ready to go.

06:04Yeah, Vanguard has done this for a while, but they have a brokerage platform.

06:07For companies that are just funds and don't have a brokerage platform, if somebody wants

06:11to move to the ETF class, will they need to open a brokerage account in order to do that?

06:17Yeah, you will need to have a brokerage account, is our expectation to have, move into the ETF

06:21share class.

06:23And I think that there's some work left to be done with the platforms in terms of making

06:28that operationally more efficient.

06:30There's probably workarounds with the transfer agency that can be helpful.

06:34And we plan to engage with a lot of the platforms now to begin some of that work.

06:39The SEC issuing this notice was always the first step.

06:42And then engagement with the platforms to make that an easy process for investors, I

06:49think, is the second step.

06:50So that is work that we are planning to engage in in the very near future.

06:55Gerard, this is exciting.

06:56I have a client writing in.

06:58Someone is listening with the sound on.

07:00And they make the point that most platforms can't offer the mutual fund and the ETF, and

07:05that platforms are still requiring fees from the ETFs.

07:08So talk to us a little bit about the distribution issues here, potentially, and the idea that

07:13a platform is loathe to, again, offer both an ETF and a mutual fund of the same strategy.

07:20Well, I think that the big question here is, what's the right thing for the end investor?

07:25And we work with lots of financial professionals who are fiduciaries for the end investor, who

07:30are going to advocate on their behalf.

07:32And ultimately, I think the platforms like ourselves want to do what our customers want.

07:39And I think in this case, they'll want to have ETF share classes.

07:42They'll want to have mutual fund share classes.

07:43For example, they may want to have the mutual fund share class in their retirement account,

07:47in their 401k account.

07:48They may want to have the same strategy in their brokerage account through an ETF share

07:52class.

07:53So I think that that's what investors will ultimately end up wanting.

07:57To an earlier point, we have $20-plus trillion in the mutual fund space.

08:02We have $10 trillion in the ETF space.

08:05There's no reason that those two pools of assets have to play a part.

08:08And the economies of scale of bringing together, I think, will ultimately benefit the end investor.

08:13And so we're all here to serve the end investor in the end of the day.

08:17And trying to understand what they want is important.

08:20But once you get that, I think that will move things in the right direction.

08:23Gerard, final question to you.

08:24Will the ETF class be cheaper?

08:26ETFs, of course, have been taking market share from mutual funds because of their costs

08:30and the ease of trading.

08:33Yeah.

08:33Dimensional has taken a unique approach to that, in my view, which is for a similar asset

08:38allocation, similar set of services, we charge a similar fee.

08:41And you can see that for our standalone ETFs and our sister mutual funds.

08:45And so our expectation is that the expense ratio should not be the thing that drives your

08:48decision about what vehicle to use.

08:50The tax efficiency should not be the decision to drive the input into the decision of what vehicle

08:56to use.

08:56It should start with the investment proposition.

08:58What's the right investment proposition?

09:00And then the choice of vehicle comes secondary.

09:03And we think that we've achieved that with our ETF complex and our mutual fund complex.

09:07And I think this pushes us down that path even further, where Dimensional's investment proposition

09:12is what drives the buying decision.

09:14And then we have a lot of vehicles that you can choose what's the right vehicle for you

09:19based on your circumstances.

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