Morningstar Magazine - April/May 2018 - 64

Investors

Davis Select Financial ETF DFNL
Category

Financial

Expense Ratio (%)

0.65

Source: Morningstar. Data as of 02/28/2018.

Davis Select U.S. Equity ETF DUSA
Category

Large Blend

Expense Ratio (%)

0.65

Source: Morningstar. Data as of 02/28/2018.

Davis Select Worldwide ETF DWLD
Category

World Large Stock

Expense Ratio (%)

0.65

Source: Morningstar. Data as of 02/28/2018.

position isn't likely to be fruitful ground for
front-runners.
In fact, Davis thinks that for most stockpickers who aren't high-turnover, small-cap
managers, or firms with hundreds of
billions of dollars of assets, the concerns about
front-running are overblown.
"There's a little bit of self-flattery around
managers who think that somehow what they
do is very secret, and that secrecy is
critical," he says. Further, Davis says, any
money manager offering strategies through
separately managed accounts is already
broadcasting his or her positions daily to clients.
Another concern is that ETF investors may have
a greater propensity to trade in and out of
a fund than do open-end fund investors, and can
do so throughout the day. Managing dramatic
swings in flows could pose a challenge to
bottom-up stock-picking.

64

Morningstar April/May 2018

Davis, again, takes a different view, contending
that an ETF's intraday trading provides realtime information about investor flows for the fund
manager. "If a huge percentage of investors
decides to get out today, the open-end
manager doesn't know about it. The investors
will have gotten out at the close of business
today, and the manager will have to raise the
money tomorrow."
A Fine Pedigree

A perhaps more significant hurdle is the need
to compete on fees, which is key in the
low-cost world of ETFs. Davis Advisors does have
a history of keeping costs down. Its openend equity funds have competitive fees compared
with similarly distributed share classes, and
those with Morningstar Analyst Ratings all earn
a Positive on the Price Pillar. Clipper, for
example, carries a 0.72% expense ratio, well
below the 1.05% category average for large-blend
funds, and also below the large-cap no-load
average of 0.89%.

The expenses on the Select U.S. Equity ETF
are even lower, 0.65% after a small fee waiver.
Davis notes that the management fees on
the ETFs and corresponding open-end funds are
the same (0.55%). "We don't want to create
fee arbitrage and offer a much better deal to one
client over another," he says.
However, when viewed from the lens many
ETF investors use, Davis ETF expenses are at the
high end of the spectrum. The median
expense ratio on large-cap blend ETFs is 29 basis
points. Within that group, Davis Select U.S. Equity
ETF ranks in the bottom quartile on fees.
Dodd Kittsley, an ETF industry veteran who
joined Davis in 2016 to help lead the ETF effort,
contends the firm's offerings should be
compared against other active ETF strategies,
rather than index-tracking products. They
peg a universe of actively run ETFs as averaging
0.77% in expenses, which is in line with
Morningstar's calculation.
Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018
