Four Dimensional Fund Advisors (DFA) mutual funds that are held in after-tax accounts managed by Foster Group at Schwab and TD Ameritrade will be converted by DFA to Exchange Traded Funds (ETFs) on Friday, June 11th. Foster Group has been carefully reviewing the conversion since DFA announced the potential changes in November of 2020 and has concluded that it will be a benefit to current shareholders.
These conversions require no action by investors. The following is provided for your information only.
Here are the funds to be converted on June 11, 2021.
Here’s why Foster Group regards this as a positive change:
1. 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.
2. 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.
3. NTF Trading: ETFs trade with no transaction fees (NTF) at Charles Schwab and TD Ameritrade (along with other custodians)
4. 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.
Note: There will likely be a small amount of cash paid to shareholders because fractional shares of ETFs are not available. The June 11th end of day dollar value of the specific mutual fund shares being converted will be used to purchase whole shares of the new ETFs. Remaining cash (dollar amounts less than one share of the new ETF) will be paid to shareholder accounts and will post two business days post-conversion. For example, the ETF DFUS was trading at $31.51 / share on June 4th. So, the most an investor would receive in cash, post-conversion based on that day’s pricing, would be $31.50.
5. The fund objectives, fund managers, and management approach will remain the same, providing continuity in fulfilling the purpose of the holding in client portfolios.
Post conversion, the tax basis in the new ETFs will be the same as it had been in the corresponding mutual funds. The holding period will transfer as well. This means that any long-term unrealized gains will remain long-term unrealized gains.
It has been Foster Group’s experience that share class conversions and other fund actions (splits, mergers, etc.) may not immediately reconcile on custodian (Schwab & TD) websites. While the conversion is scheduled to take place after market closing on Friday, June 11th, share calculations and the post-conversion pricing displayed may take 24 hours to fully reflect the action. Additionally, the excess cash amounts that were less than the share price of the ETF at conversion will not be paid to client accounts until two business days after the conversion. Cost basis is expected to be updated on custodian websites one business day post-conversion.
As always, if you have any questions, please contact us at your convenience. We’ll be glad to talk through this conversion or any other questions you may have.
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at www.fostergrp.com/disclosures. A copy of our written disclosure Brochure as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov. Past performance does not guarantee future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Foster Group), will be profitable or equal any historical performance level. All investment strategies have the potential for profit or loss. Investment strategies such as asset allocation, diversification, and rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There is no guarantee that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Any projections in this article is not a prediction or projection of actual investment results and there can be no assurance that any projection will be achieved. Changes in investment strategies, contributions or withdrawals may materially alter the performance of an individual’s portfolio. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Projections, forecasts and estimates referenced on the Website are not purely historical in nature and are therefore necessarily speculative and subject to material variation. Kent Kramer, CFP®, AIF®, is a registered investment adviser representative of Foster Group, Inc., an investment adviser registered with the U.S. Securities Exchange Commission since 1991.