DFAE: Unconvincing Factor-Based Emerging Market ETF

seekingalpha06-27

samxmeg/iStock via Getty Images DFAE strategy Dimensional Emerging Core Equity Market ETF (NYSEARCA:DFAE) is an actively managed ETF focused on emerging markets launched on 12/01/2020, featuring a 30-...

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href=https://seekingalpha.com/article/4701168-dfae-unconvincing-factor-based-emerging-market-etf><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>samxmeg/iStock via Getty Images DFAE strategy Dimensional Emerging Core Equity Market ETF (NYSEARCA:DFAE) is an actively managed ETF focused on emerging markets launched on 12/01/2020, featuring a 30-...</p>\n\n<a href=\"https://seekingalpha.com/article/4701168-dfae-unconvincing-factor-based-emerging-market-etf\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU1211504680.USD","symbol_name":"ALLIANZ HIGH DIVIDEND ASIA PACIFIC EQUITY \"AM\" (USD) 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Dividends are paid quarterly. As described in the prospectus by Dimensional, the fund “implements an integrated investment approach that combines research, portfolio design, portfolio management, and trading functions,” focusing on “lower relative price, and higher profitability companies as compared to their representation in the Emerging Markets Universe.” Relative price is evaluated based primarily on price to book value, and on other factors like price to earnings and price to cash flow. Profitability is evaluated based on earnings or profits from operations in relation to book value or assets. These criteria may change over time. The strategy also considers technical considerations like momentum and reversals. Additionally, the fund intends to manage risk through diversification across companies, sectors and countries. The portfolio turnover rate is low: only 5% in the most recent fiscal year. This article will use as a benchmark iShares MSCI Emerging Markets ETF (EEM). Portfolio DFAE has a very extended portfolio of more than 5000 holdings; 1907 of them have individual weights of 0.01% or more and an aggregate weight of 94.9%. About 76% of asset value is in large and mega caps, 18% in mid-caps and 6% in small and micro caps. The heaviest countries in the portfolio are China (24.2%), India (20.3%), Taiwan (19.8%) and South Korea (11.8%). Other countries are below 5%. About 44% of asset value is in China and Taiwan, which represents a large exposure to geopolitical risks, like for most emerging markets funds. In fact, the country allocation is very close to the benchmark, as reported below.   DFAE geographical allocation (chart: author; data: Dimensional, iShares) Technology is the heaviest sector with 23.1% of assets, followed by financials (19.1%) and consumer discretionary (11.8%). Other sectors are below 10%. DFAE sector breakdown is also close to the benchmark.   DFAE sector breakdown (chart: author; data: Dimensional, iShares) Despite holding thousands of stocks, DFAE is quite heavy in the top names. The top 10 constituents, listed in the next table, represent 20.4% of assets, and Taiwan Semiconductor Manufacturing Co (TSM) alone weighs almost 8%. Risks related to other individual companies are low.   Name Weight Ticker isin   TAIWAN SEMICONDUCTOR MANU 7.86% 2330 TT TW0002330008   TENCENT HOLDINGS LTD 3.50% 700 HK KYG875721634   SAMSUNG ELECTRONICS CO 2.78% 5930 KS KR7005930003   ALIBABA GROUP HOLDING LTD 1.43% 9988 HK KYG017191142   CHINA CONSTRUCTION BANK C 0.93% 939 HK CNE1000002H1   SK HYNIX INC 0.91% 660 KS KR7000660001   PDD HOLDINGS INC 0.83% PDD US7223041028   HON HAI PRECISION INDUSTR 0.81% 2317 TT TW0002317005   RELIANCE INDUSTRIES LTD 0.70% RELIANCE INE002A01018   ICICI BANK LTD 0.66% IBN US45104G1040   Click to enlarge DFAE is a bit cheaper than EEM regarding valuation ratios, as reported in the next table. It also shows slightly better growth rates.     DFAE EEM   Price/Earnings 13.76 14.23   Price/Book 1.58 1.67   Price/Sales 1.21 1.45   Price/Cash Flow 8.27 9.09   Earnings Growth 17.83% 16.58%   Sales Growth 6.20% 4.98%   Cash Flow Growth 4.58% 2.25%   Click to enlarge Source: Fidelity website. Historical performance Since its inception in December 2020, the Dimensional fund has outperformed EEM by about 15% in total return. DFAE vs EEM, since 12/2/2020 (Seeking Alpha) However, the gap is only 2.5% over the last 12 months. DFAE vs EEM, trailing 12 months (Seeking Alpha) The dividend growth history is short, but encouraging. The annual sum of distributions has increased from $0.45 per share in 2021 to $0.59 in 2023. This 2-year growth rate of 31% has outpaced EEM distributions (9.3% growth in the same time) and the cumulative inflation (about 10% based on CPI).   DFAE distribution history (Seeking Alpha) DFAE vs competitors The next table compares characteristics of DFAE and five factor-based emerging markets ETFs:  WisdomTree Emerging Markets High Dividend Fund (DEM) WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) Invesco FTSE RAFI Emerging Markets ETF (PXH) First Trust Emerging Markets AlphaDEX Fund (FEM) Cambria Emerging Shareholder Yield ETF (EYLD).      DFAE DEM DGS PXH FEM EYLD   Inception 12/1/2020 7/13/2007 10/30/2007 9/27/2007 4/18/2011 7/13/2016   Expense Ratio 0.35% 0.63% 0.58% 0.49% 0.80% 0.66%   AUM $4.19B $2.96B $2.44B $1.25B $451.27M $414.07M   Ag Daily Volume $20.49M $11.12M $17.58M $3.34M $1.10M $3.26M   Holdings 5644 483 955 437 173 108   Top 10 20.40% 32.59% 8.23% 28.06% 14.15% 22.40%   Turnover 5.00% 43.00% 53.00% 21.00% 105.00% 43.00%   Dividend Yield (TTM) 2.28% 5.26% 3.83% 4.42% 4.77% 4.49%   Click to enlarge DFAE is the most recently launched, but the largest (in assets under management) and most liquid (in dollar volume) of these funds. It has the lowest expense ratio, turnover, and dividend yield. The next chart compares total returns since its inception. DFAE is lagging its peers by a significant margin, 28.5% behind the best performer EYLD. DFAE vs. competitors, since inception in 2020 (Seeking Alpha) It is also in last position over the last 12 months: DFAE vs. competitors, 12-month return (Seeking Alpha) Takeaway Dimensional Emerging Core Equity Market ETF holds thousands of emerging markets stocks with value and profitability characteristics. DFAE is well-diversified across sectors and holdings, but has a huge exposure to risks related to China, like many emerging markets funds. DFAE beats an emerging markets benchmark regarding valuation, fundamental growth, dividend growth and return. However, it has underperformed a number of factor-based emerging markets ETFs, in particular Cambria Emerging Shareholder Yield ETF. Nonetheless, with less than 4 years of historical data, the DFAE track record is short and may not represent the long-term potential of its strategy.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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