Dimensional Grafts Vanguard’s Tax-Busting Model Onto Mutual Fund

Dimensional Fund Advisors is becoming the first asset manager to launch an exchange-traded fund share class of a mutual fund since Vanguard Group’s patent on the model expired nearly three years ago.

The actively managed Dimensional US Micro Cap ETF begins trading on Friday under the ticker DFMC, Dimensional said in a statement. DFMC is a share class of the company’s US Micro Cap Portfolio, which has existed as a mutual fund since 1981.

With Friday’s launch, Dimensional is the first to successfully mimic Vanguard’s fund blueprint since the Securities and Exchange Commission gave its blessing to the move last September. In creating an ETF as a share class of an existing mutual fund, the former vehicle’s tax efficiency is effectively being ported over to the latter.

The model was cheered by SEC Chair Paul Atkins, who wrote in an opinion piece in the Washington Post last month that it would extend “a major tax break to millions of people investing to build wealth” because the ETF won’t be exposed to the capital-gains tax liability that mutual-fund shareholders face when assets are sold off to meet redemptions.

It’s a potentially significant shift for the asset-management industry, which has seen trillions of dollars drain from mutual funds in favor of ETFs over the past decade.

“We designed this fund for institutional investors at a time when they were concerned about being overly concentrated in US large caps — that was 45 years ago, so in some ways, history repeats itself,” Joel Schneider, the firm’s deputy head of portfolio management for North America, said in a phone interview. “We now have an ETF share class with a 45-year track record.”

The fund design was pioneered by Vanguard, who enjoyed its exclusive use for nearly two decades before its patent expired in May 2023. Dimensional is the first in a potentially long line of issuers waiting in the wings after the SEC granted exemptive relief to dozens of firms including BlackRock, JPMorgan, Fidelity and State Street in December.