Tax-Managed Fund Conversion Information Page


Latest Conversion Updates

September 13: The conversion of the two non-US-market tax-managed mutual funds to ETFs has completed and each ETF has listed on NYSE Arca as of this morning. Most shareholders, including those holding the funds in brokerage accounts with Schwab, TD Ameritrade, and Fidelity, should see those shares in their accounts sometime today. See the “Platform-Specific Considerations” section for additional details on timing for select platforms.


Conversion Plan and Benefits

Dimensional plans to convert six tax-managed mutual funds into ETFs through the reorganization of the funds into newly created ETFs, which we believe will result in multiple benefits for investors, including:

  • Improved Tax Efficiency: Converting to an ETF structure can provide benefits with respect to the management of capital gains distributions, allowing for potentially greater tax efficiency for the funds.

  • Lower Fees: Each reorganization will result in significant management fee reductions (listed by fund in the appendix), representing a 27% average reduction on an asset-weighted basis across the converting funds.

  • NTF Trading: ETFs trade with no transaction fees (NTF) on many platforms.

  • Tax-Free Reorganization: Shareholders will not recognize a taxable gain (or loss) on the conversion of the mutual fund to ETF shares for US tax purposes. An exception, albeit small, regarding fractional mutual fund shares is explained in later sections of this information page.

The conversion of the six tax-managed mutual funds is occurring in two phases, with the conversion of the four US-market tax-managed mutual funds occurring first and the two non-US-market funds converting later. This staggered approach allows for additional time we believe is needed to complete operational setup for non-US markets.


Exhibit 1

US-Market Funds

Non-US-Market Funds


Important Dates

The following timelines provide estimated completion dates for important steps in the conversion process of the converting US-market and non-US-market mutual funds. Completed steps are in gray. The timelines will be updated to reflect future completed steps or, if necessary, changes to target dates. Unless otherwise noted, all dates are in 2021.

   

US-Market Funds


  • November 17, 2020: New ETF registration statement filed with the SEC

  • March 3: Form N-14 filed with the SEC

  • April 6: Form N-14 final/effective

  • April 16: Final Form N-14 mailed to fund shareholders

  • June 9: Last day to place purchase orders in the converting funds

  • June 10: Last day to place redemption orders in the converting funds1

  • June 11: Conversion date

  • June 14: ETFs listed on NYSE Arca

Non-US-Market Funds

  • November 17, 2020: New ETF registration statement filed with the SEC

  • May 7: Form N-14 filed with the SEC

  • June 14: Form N-14 final/effective

  • June 28: Final Form N-14 mailed to fund shareholders

  • September 8: Last day to place purchase orders in the converting funds

  • September 9: Last day to place redemption orders in the converting funds1

  • September 10: Conversion date

  • September 13: ETFs listed on NYSE Arca


Key Conversion Details

The following details in this section apply to the conversion of both the US-market and non-US-market funds unless otherwise indicated. The “Platform-Specific Considerations” section below includes additional conversion details for commonly used custodians.

   

Conversion Mechanics


  • The conversion of mutual fund shares to ETF shares is structured as a tax-free reorganization for US tax purposes.

  • Mutual fund shares will convert to shares of equal value of the new ETFs. Shareholder interests will not be diluted.

  • ETF shares are not currently issued in fractional shares. Fractional mutual fund shares will be redeemed and paid out at net asset value. The redemption of these fractional shares will generally be a taxable event, albeit small, if the investment is held in a taxable account.

  • The holding period and tax basis of the ETF shares will be the same as the corresponding mutual fund shares exchanged.

  • Following the conversion, the new ETFs will list on NYSE Arca. The converting mutual funds will be fully converted and closed.


Portfolio Management

  • Dimensional will remain the advisor to the ETFs, and there are no changes to the named prospectus portfolio managers.

  • The new ETFs will retain the current investment objectives, investment strategies, and investment restrictions of the converting mutual funds.

Tax Analysis

  • A draft copy of the legal tax opinion of the conversion is included as an exhibit to both the US-market and non-US-market tax-managed fund Form N-14 filings.

  • The conversion will not occur without a satisfactory legal opinion that the reorganizations will be tax-free for US tax purposes.

Board Oversight

  • The board overseeing the converting mutual funds, which also serves as the board to the ETFs, has approved the conversion based on its determination that it is in the best interests of the shareholders.

Shareholder Actions

  • No action is required for accounts holding the converting mutual funds that can also hold ETFs. We anticipate this is true for the vast majority of shareholders, but shareholders or professionals managing their accounts should confirm with their platform or financial intermediary.

  • No vote is being requested of shareholders. A shareholder vote is not required to approve the reorganization under state law or the 1940 Act.

Conversion Costs
 
  • For all converting US- and non-US-market funds, the reduction in management fees that results from the reorganization is greater than the estimated costs of the conversion to the portfolios when measured as a percentage of net assets.

  • Estimated conversion costs for each of the US- and non-US-market funds, as well as details on expense caps that limit reorganization costs paid by the non-US-market funds, are included in their respective Form N-14s and in the appendix of this information page.

Pre-Conversion Mutual Fund Trading

  • The last day purchase orders in the converting mutual funds can be placed is two days prior to conversion date. The last day redemption orders can be placed is the day prior to conversion date. See “Important Dates” above for specific dates for US- and non-US-market funds.

Post-Conversion ETF Trading

  • Availability of ETF shares in shareholder accounts and the ability to trade them following the stated conversion date may vary by platform. Please see the “Platform-Specific Considerations” section below.



Platform-Specific Considerations

The information below reflects the latest guidance that Dimensional has received from platforms regarding the expected processing of the conversion. Dimensional makes no guarantees regarding the accuracy of this information. Shareholders or professionals managing their accounts should also consider confirming these details with their respective platforms if this information could affect their ability to manage the accounts as needed.


Exhibit 2

Platform-Specific Q&A

Click table to expand

Options to Shareholders of the Converting Funds

Shareholders of the converting US-market and non-US-market mutual funds should know the options available to them with respect to the conversion. Those include:

  1. Maintain current positions in the converting mutual funds and receive ETF shares at the conversion date. We believe this offers several benefits to shareholders, including no taxable gains on the conversion of mutual fund to ETF shares, with the small exception of fractional mutual fund shares redeemed in taxable accounts. Additional expected benefits are outlined in the Form N-14 filings as well as in the "Conversion Plan and Benefits" section above.

  2. Exchange shares of the converting mutual funds into another Dimensional mutual fund prior to the conversion. Gains realized from exchange transactions are generally taxable if holding the investments in a taxable account. To effect an exchange transaction, you can contact your custodian or the mutual fund’s transfer agent if shares are held directly with Dimensional.

  3. Redeem shares of the converting mutual funds. Gains realized from a sale are generally taxable if holding the investment in a taxable account.



Additional Q&A—Conversion

We anticipate that the vast majority of shareholders of the converting tax-managed mutual funds hold shares in accounts that can hold ETFs and will be able to accept ETF shares as part of the conversion. If it is confirmed that an account can hold ETF shares following the conversion, then no additional action will need to be taken prior to the conversion for the account to receive ETF shares. However, not all shareholders are currently in accounts that can hold ETFs. Shareholders, or the financial professionals they work with, should contact the intermediary that currently maintains their account(s) holding the converting mutual funds to ask whether ETF shares can be held. If it’s determined that ETF shares cannot be held, they should ask what steps can be taken to move their holdings in the converting mutual funds to an account that can accommodate both mutual funds and ETFs. This action is best taken as soon as possible.

Converting our tax-managed mutual funds into ETFs provides the funds an additional tool common to ETFs, through in-kind redemptions, for managing capital gains. We believe this will benefit shareholders seeking to minimize the impact of taxes on investment returns. Additionally, a tax-free reorganization allows existing shareholders of the converting mutual funds to receive ETF shares while avoiding a taxable event. Investors would generally not be able to avoid a taxable event if selling a mutual fund to invest in an ETF.

Funds commonly bear certain kinds of operating costs, such as costs associated with service providers and printing and mailing information to shareholders. It is informative to consider the dollar cost of conversion in the context of total fund AUM and the management fee reduction also occurring as part of the conversion. For all converting US- and non-US-market funds, the reduction in management fees that result from the reorganization is greater than the estimated costs of the conversion paid by the portfolios when measured as a percentage of net assets.

Conversion costs for both the US-market and non-US-market fund reorganizations include professional fees, charges by service providers, and any costs related to the printing and mailing of the information statement/prospectus. The non-US-market funds are expected to incur transaction costs on in-kind security transfers, such as transfer fees and stamp duties, that are unique to certain international markets. For the TA World ex US Core Equity Portfolio only, additional transaction costs are expected for sales of nontransferable securities that must be made in certain international markets that do not permit the in-kind transfer of securities.

The TA World ex US Core Equity Portfolio invests in certain markets that do not permit the in-kind transfer of securities. We expect this will require the sale of securities in those markets, and these sales are expected to result in the realization of capital gains within the portfolio. This is not expected to result in a distribution of capital gains to shareholders because the portfolio currently has capital loss carryforwards that exceed the expected realized capital gains. Additionally, while this does result in a capital gain tax paid by the portfolio, it will not affect the portfolio’s net asset value or price per share given the portfolio’s accounting policies on accrual of expected taxes associated with unrealized gains.

Tax-efficiency ratios for many of Dimensional’s mutual funds have been similar to comparable competitor ETFs over the last decade. Following the SEC’s adoption of the ETF Rule (Rule 6c-11), permitting greater flexibility to implement Dimensional’s investment approach within an ETF, we saw the opportunity to harness the tool for these tax-managed mutual funds, which should offer investors greater control over the timing of capital gains through the use of in-kind redemptions. As of today, we expect that going forward our ETFs will result in higher tax-efficiency ratios than our mutual funds investing in a similar strategy, just as we have always expected our tax-managed mutual funds to have higher tax efficiency than similar non-tax-managed mutual funds.

Some shareholders that hold fractional shares in a converting mutual fund at the time of its conversion will receive cash in lieu of shares, given fractional ETF shares cannot be issued. The redemption of these fractional shares will generally be a taxable event if the investment is held in a taxable account, albeit based on the value of a single fractional share and therefore small. While daily per-share net asset values can fluctuate, to provide an idea of the maximum potential redemption amount, the per-share net asset values of the converting mutual funds ranged from $26.40 to $58.43 as of April 26, 2021.

Most custodians we have spoken to, including Schwab, TD Ameritrade, and Fidelity, can accommodate fractional shares in a customer account at the individual tax lot level, but not at the customer account level. Consider the following example:  A customer has three tax lots for a converting mutual fund that each have 1.5 shares at the following tax bases:


  • Lot 1 – 1.5 shares @ $11.80 purchased on June 8, 2002
  • Lot 2 – 1.5 shares @ $9.92 purchased on October 27, 2008
  • Lot 3 – 1.5 shares @ $23.22 purchased on May 24, 2020

These lots represent a total combined position of 4.5 shares at the customer account level. Because custodians cannot accommodate fractional shares at the account level but can at the lot level, only the 0.5 fractional share amount will receive cash in connection with the mutual fund to ETF conversion. The lot that will receive the cash in lieu of the fractional share will be identified based on the tax lot methodology that is being applied to the account. For example, if the account uses FIFO (first in, first out) methodology, the 0.5 shares that will be cashed out will come from Lot 1 since it is the oldest lot. Lots 2 and 3 will retain the fractional shares and the cost basis will carry over in connection with the conversion since the sum of these is a whole number. The amount of cash paid for the 0.5 shares will be based on the market price at the time the custodian executes the sell order. This is expected to occur shortly after ETF shares are allocated to each customer account. The cash paid will be made available in customer accounts upon settlement of the trade at T+2. Generally, custodians have indicated that this will be reflected as a separate cash-in-lieu transaction in a customer’s account.

Most shareholders of the converting mutual funds have the option through their custodian to have dividend and capital gains distributions automatically reinvested, so those shareholders receive these distributions in the form of additional shares of the portfolio at net asset value. Some, but not all, custodians provide for this automatic reinvestment option for ETFs. Therefore, after conversion, shareholders of the ETFs may receive dividend and capital gains distributions in cash unless the platform where the investment is custodied offers a reinvestment program. Investors should consult their custodian to understand the available options.

We do acknowledge that there are certain types of platforms, although limited, that do not accommodate ETFs. An example is retirement platforms. When these cases are identified, Dimensional is engaging the platforms to coordinate communications to shareholders. As we cannot ensure all instances are identified, shareholders or the financial professionals they work with should take steps to confirm their accounts can accept ETF shares as part of the conversion.

For most platforms, required shareholder communications will be handled in the same fashion as other required regulatory notifications, such as the delivery of the prospectus and shareholder reports, but this can vary by platform.


Regarding communication from Dimensional, printed (or emailed for shareholders who have elected to receive electronic mail) copies of each final Form N-14 will be sent to fund shareholders. Details on the timing of these mailings are outlined in the “Important Dates” section above. Dimensional will not send communications directly to shareholders prior to these mailings unless Dimensional believes a shareholder holds a converting mutual fund outside of a brokerage account. Those shareholders may receive a notice regarding the need to open a brokerage account.

Yes. The new ETFs will retain the performance history of the converting mutual funds post conversion. This will be reflected in the reporting that Dimensional makes available on its public and client sites, as well as in other fund resources such as fact sheets and pitch books. Dimensional is also working with certain service providers for performance reporting such as Morningstar, Lipper, and Bloomberg and we expect that reporting from these providers will also carry over the performance from the mutual fund to the ETF post-conversion. Many custodians use these providers for performance reporting within their internal systems and for reporting they provide to clients. To the extent they do so, the performance should carry over. There may be other service providers that do not carry over performance reporting from the mutual fund to the ETF post-conversion, generally because of the CUSIP change that will occur in connection with the conversion. Financial professionals should check with their custodian and performance reporting providers to understand if the performance will carry over in the data feeds they receive.

The currently planned reorganizations include tax-managed mutual funds that do not operate in a master-feeder structure. This does not include the Tax-Managed US Marketwide Value Portfolio, which does operate in a master-feeder structure. We will continue to evaluate options for this portfolio.

We do not currently have plans to convert any of our existing, non-tax-managed mutual funds to ETFs. Converting the announced tax-managed mutual funds to ETFs provides us greater ability to limit capital gains and increase after-tax returns in these funds, which is a goal that is unique to the tax-managed mutual funds.

 

Additional Q&A—General ETF Considerations

Dimensional is committed to supporting financial professionals by providing educational resources on differences between how ETFs and mutual funds trade as well as potential considerations for trading ETFs for their clients. Dimensional has both written and video resources available to financial professionals on these topics (see the “ETF Education Resources” section below). Members of Dimensional’s investment and capital market teams are available for discussions on ETF trading practices and/or support on larger ETF trades. Additionally, financial professionals should be aware that block trading desks at custodians can also be a helpful resource for addressing questions on ETF trading and forming trading strategies given client objectives and constraints. We are happy to help connect clients with contacts at their custodian’s trading desk.

While certain custodians offer fractional share trading for stocks, none that we have spoken to currently allow fractional share trading for ETFs, although others may allow them now or in the future.

Custodians we have spoken to do not support automated transactions for ETFs due to the nature of ETF trading. For example, automated trades placed in advance may be subject to unexpected market conditions on the actual trade date that may lead to less favorable trading outcomes for investors. We will continue to engage with platforms and will share any information we find that may help clients currently using automated trading functionality available to mutual funds. Investors should also consult their custodian to understand any available options.

For many platforms, the default is FIFO (first in, first out) or identified lot, but additional methods are supported and may vary. Shareholders, or the financial professionals they work with, should confirm the tax lot identification methods that can be used in connection with the sale of ETF shares with their platform or financial intermediary.

Dimensional is unable to provide guidance to financial professionals on requirements related to securities licensing. We can share that information regarding licensing requirements is available through FINRA, and information is posted to FINRA’s public website. This includes guidance on authorized activities for each securities license.

We do not believe that investment professionals overseeing assets in the converting tax-managed mutual funds would be subject to Form 13H reporting requirements directly as a result of the conversion. However, we would expect subsequent trades in Dimensional ETFs, which are identified as qualifying NMS securities, would be included in determining the activity level that defines a large trader and the related requirements for Form 13H reporting. Investment professionals should consider seeking independent legal advice for determining their requirements for Form 13H reporting.

Investment professionals overseeing accounts that hold Dimensional ETFs may be required to file Form 13F depending on the level of assets over which they exercise discretion. The requirement to file the form is met by investment professionals that exercise discretion on $100 million or more in securities identified by the SEC, which includes equity securities that trade on national exchanges, ETFs, certain equity options and warrants, shares of closed-end investment companies, and certain convertible debt securities. Investment professionals should consider seeking independent legal advice for determining their requirements for Form 13F reporting.

Footnotes

  1. 1All redemption orders placed the day prior to the conversion date will be processed outside of the NSCC and will be settled manually.

 


 

Appendix

Item A–Management Fee Reductions

Item B–Estimated Conversion Costs for the US-Market Funds

* Estimated expenses equal less than 0.01% of average net assets.


Item C–Estimated Conversion Costs for the Non-US-Market Funds

*Actual costs that exceed the expense cap will be paid by Dimensional. 

**Net assets calculated as of April 15, 2021.


Disclosures

The New ETFs will not be sold to the general public until after the reorganizations. This communication is not an offer to sell the shares of the New ETFs.

All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

This information is provided for registered investment advisors and institutional investors and is not intended for public use. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at us.dimensional.com. Dimensional funds are distributed by DFA Securities LLC.

ETFs trade like stocks, fluctuate in market value, and may trade either at a premium or discount to their net asset value. ETF shares trade at market price and are not individually redeemable with the issuing fund, other than in large share amounts called creation units. ETFs are subject to risk similar to those of stocks, including those regarding short-selling and margin account maintenance. Brokerage commissions and expenses will reduce returns.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. This information should not be relied upon as a primary basis for an investment decision.