Dimensional Fund Advisors has launched a new fully transparent active ETF designed to systematically capture multiple factor risk premia within emerging market equities, excluding China.

The fund represents Dimensional’s first emerging markets ex-China systematic multi-factor ETF.

The Dimensional Emerging Markets ex China Core Equity ETF (DEXC US) is listed on NYSE Arca with an expense ratio of 0.43%.

This fund marks Dimensional’s sixth broad emerging markets ETF and the first to exclude China from its allocation.

The launch comes as investors increasingly reassess their exposure to China amidst a backdrop of economic challenges, including an ongoing real estate crisis, deflationary pressures, declining exports, and rising youth unemployment.

By offering an emerging markets ex-China approach, the ETF provides investors greater flexibility to tailor their exposure to Chinese equities within broader emerging markets portfolios. Some investors may choose to avoid China altogether, while others might blend ex-China strategies with China-focused investments to meet their specific preferences.

Notably, Dimensional has yet to introduce a China-specific systematic multi-factor ETF.

Investment Strategy

The ETF is benchmarked against the MSCI Emerging Markets ex-China Index, a widely used market cap-weighted performance gauge of large- and mid-cap stocks from 23 emerging market countries, excluding those listed in China.

While the fund broadly reflects its benchmark, its prospectus allows for investments in emerging and frontier market countries outside the index (excluding China) as well as in smaller capitalization countries that do not meet the benchmark’s criteria.

The ETF employs a systematic investment process, guided by quantitative rules, to emphasize three key factors:

• Smaller Capitalization: stocks with lower market capitalization.
• Lower Value: stocks with lower valuations based on metrics like price-to-book, price-to-earnings, and price-to-cash flow ratios.
• Higher Profitability: stocks with stronger profitability metrics such as earnings-to-book value or profits-to-book value.

The portfolio construction process integrates these factors by boosting the selection of companies with these characteristics and modestly overweighting them relative to the benchmark, all while maintaining broad diversification across countries, sectors, and individual stocks.

The ETF’s managers may also adjust exposures based on shorter-term signals such as price momentum or short-run reversals to optimize returns while managing risks. This systematic multi-factor approach aligns with Dimensional’s philosophy of harnessing long-term drivers of returns through disciplined and transparent portfolio construction.