Active ETF Strategies to Better Navigate the Emerging Markets | ETF Trends

Investors should consider the opportunities in developing economies and the advantages of systematic, active emerging market exchange traded fund strategies.

In the recent webcast, How a Systematic Active Approach Can Pinpoint Opportunities in Emerging Markets, Althea Trevor, senior investment director at Dimensional Fund Advisors, noted that the emerging markets make up about 13% of the global stock market capitalization, and compared to the U.S. markets, the developing markets continue to trade at relatively cheap valuations, especially the emerging market value style.

Trevor also pointed out that emerging markets may also outperform in the market environment ahead as average annual returns have typically been higher during periods of above-median U.S. inflation. Specifically, emerging markets have shown an average annualized return of more than 18% in years with above median U.S. inflation from 1990 through 2021, compared to the U.S. market’s average return of about 9%. She argued that staying invested in equities could help outpace inflationary pressure on wealth over the long term.

To help investors better access emerging market opportunities, Dimensional Fund Advisors has come out with a suite of emerging market-related ETF strategies, including the Dimensional Emerging Core Equity Market ETF (NYSE Arca: DFAE), the Dimensional Emerging Markets Core Equity 2 ETF (DFEM), the Dimensional Emerging Markets Value ETF (DFEV), and the Dimensional Emerging Markets High Profitability ETF (DEHP).

DFAE is designed to leverage the power of Dimensional’s investment engine — a consistent investment philosophy combined with a value-added approach to implementation that the firm has been testing, refining, and advancing for nearly four decades.

DFEM serves as an emerging markets total market solution that targets higher expected returns and consistent exposure through a daily flexible process.

DFEV is an emerging markets value solution that targets higher expected returns and consistent exposure through a daily flexible process.

Lastly, DEHP fits as an emerging markets high profitability solution covering large-caps and mid-caps that targets higher expected returns and consistent exposure through a daily flexible process.

Trevor explained that Dimensional ETFs go beyond basic indexing. Market prices contain reliable information that can be used to position portfolios toward higher expected returns. Daily flexibility allows Dimensional to consistently focus on higher expected returns, manage risks, and trade efficiently. Lastly, Dimensional’s emerging markets ETFs are priced within the lowest decile of Morningstar category peers.

Specifically, Dimensional ETFs focus on company size with small-caps over large-caps to capture a size premium, target the value premium or value over growth opportunities, and include a profitability premium to select highly profitable companies. These market factors have helped explain the outperformance of Dimensional’s strategy in 2021 when large-caps underperformed small-caps, growth underperformed value, and low profitability underperformed high profitability.

Trevor also pointed out that Dimensional’s methodology has stood out within the active fund industry. Of the total number of U.S.-domiciled equity and fixed-income mutual funds, only 46% have survived and 16% have outperformed as of the end of June 2022. In comparison, Dimensional funds have all withstood the test of time and 83% have outperformed benchmarks.

Furthermore, Dimensional emerging market ETF strategies provide broad diversification benefits at competitive prices relative to peers, coming with expense ratios that fall below 25% of category peers.

Financial advisors who are interested in learning more about emerging opportunities can watch the webcast here on demand.