Just three years after entering the active ETF space, Dimensional Fund Advisors has become one of the top providers.
While active ETFs have been around for decades, they’ve only recently exploded in popularity.
According to Morningstar, in each calendar year since 2018, active ETFs gained at least $25 billion and had an annual organic growth rate of more than 30 percent. By the end of October 2023, active ETFs had about $444 billion in assets, triple the amount in October 2020.
Active ETFs represented just 3.2 percent of the U.S. ETF market in 2020 but over the past three years have claimed 14 percent of net flows, according to Morningstar.
Much of those flows have gone to Dimensional.
Despite only being an active ETF issuer since 2020, Dimensional now manages more than $100 billion in AUM, split across 38 funds. According to Morningstar, four of the top 10 largest active ETFs are Dimensional’s.
Dimensional is the largest active ETF issuer, ranked by assets, according to Cerulli Associates, the data and research company focused on wealth and asset management. This is followed by J.P. Morgan Asset Management, First Trust, and American Century, as of the second quarter of 2023.
Year-to-date, nine of Dimensional’s ETFs have net flows of more than $1 billion, and all 38 funds have had positive cash flows. According to the company, 21 Dimensional ETFs have had more than $1 billion in positive net flows since inception. The company recorded year-to-date flows of $26 billion in net new assets in 2022 and in 2023.
RIA Intel sat down with Rob Harvey, co-head of product specialists at Dimensional, to discuss Dimensional’s ETF business.
Responses have been edited for clarity and length.
The active ETF space has grown a lot in recent years and Dimensional has seen a lot of success. Do you think the growth is sustainable, especially given the popularity of things like direct indexing? Have you reached the peak?
We definitely don’t think we’ve reached the peak. When you look at the flows of what we’ve been able to capture, even as recently as this year, it’s been tremendous, and we think there’s a lot of runway left to go for the product suite. That includes money coming into the existing products we have as well as new launches. We’ve launched seven new funds this year. At the same time, the older ETFs are still gaining a lot of traction in the market and we’re picking up market share.
What prompts the introduction of new funds?
When you see us come to market with new strategies, a lot of that is because we are hearing about it directly from financial professionals we work with. They are saying ‘I have a need in my portfolio, or my client has a need in their portfolio.’ And when you have a process of product launching that way, it sort of sets you up naturally for success because you know there’s going to be demand from the financial professionals you partner with.
Where are the flows of your ETF funds coming from? Is it all from mutual funds?
We’ve definitely seen flows from mutual funds to ETFs to an extent and that’s a good thing. It would be really weird if we launched ETFs and none of our existing investors wanted to move over to ETFs. But additionally, launching ETFs has also attracted new business. We partner with a lot more financial professionals than we did before we had ETFs. In fact, we’ve grown the number of financial professionals we work with by over a third since 2019. I don’t have exact numbers but it’s in the thousands. So, it’s opened the door to a lot of productive conversations with investors we never really got the chance to talk to before.
All 38 of Dimensional’s ETFs have had positive cash flows year-to-date. Does that say more about the markets this year or more about Dimensional?
This happened last year as well. The state of the market last year was completely different from the state of the market this year. Dimensional’s co-CEO Gerard O’Reilly has mentioned this before, and I think it’s a great point to make. We do a lot of work with financial professionals to make sure that they’re well aligned and that they have a long-term focus and so the macroeconomic picture of what’s happening in the markets is a lot less impactful on flows than you might think.
Our clients aren’t running for the exits as soon as things start to go a little bit south in the market, they understand that to get the full benefit of what we have to offer, they have to stick with a long-term approach of staying invested.
