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Dimensional Fund Advisors has launched two exchange-traded funds, including one global stock ETF with exposure to more than 10,000 companies and one focused on ultra-short-term bonds.
The Dimensional World Equity ETF (DFAW) and the Dimensional Ultrashort Fixed Income ETF (DUSB) follow the launch of the Dimensional US Core Equity 1 ETF (DCOR) earlier this month. The two latest funds, which were both launched on Wednesday, add to the roster of 32 ETFs Dimensional already has with a combined $98 billion in assets under management.
The new funds are both based on Dimensional’s process of “rules-based active investing,” but they have different goals. DFAW is meant to be a core equity holding. It invests in five of Dimensional’s other stock ETFs, giving it exposure to more than 10,000 stocks across the globe. DUSB is meant to give customers focused exposure to bonds with an average duration of up to one year.
“Step one is client demand; we need clients to ask us for this product. Then we build a product that we think will outperform our benchmark net of fees,” Joe Hohn, one of the portfolio managers for DFAW, said in an interview.
Stock Diversification Is a ‘Free Lunch’
Hohn calls diversification “the only free lunch” in investing, and so DFAW contains a wide a universe of stocks.
“I don’t know of any other ETF or fund that has that much exposure, in terms of name count,” Hohn said.
Holding lots of stocks could lead to high trading costs, but Hohn said DFAW managers won’t need to trade regularly because they won’t be rebalancing the fund to match an index.
The same overall strategy is used in the Dimensional Global Equity Portfolio (DGEIX) mutual fund, which has been running since 2003 and which now has $7.9 billion in assets under management. According to Dimensional Fund Advisors, DGEIX has an annualized return of 8.4%, compared with 7.7% for its benchmark, the MSCI World Index.
The fund looks at a broad universe of stocks and then overweights and underweights them according to value, size and profitability metrics, because those metrics lead certain stocks to outperform over the long term, Hohn said.
Bond ETF Considers Inverted Yield Curve
Ultra-short-term bond funds like DUSB are particularly attractive when the yield curve is inverted, meaning that yields on shorter-duration bonds are higher than those of longer-duration ones. Hohn wouldn’t say when he expects the yield curve to normalize, because Dimensional Fund Advisors doesn’t believe in timing the market.
“The fund may not be as attractive when the yield curve normalizes, but that’s OK. This is meant to be one tool in our investors’ toolbox for when they want short-term bond exposure,” Hohn said.
The fund invests in investment-grade corporate bonds and treasury bonds from around the world.
DFAW has an expense ratio of 0.25% and DUSB’s is 0.15%. Dimensinal plans to launch four more funds in November.
Contact Gabe Alpert at gabriel.alpert@etf.com
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