NVSEF - DFIV: Attractive Valuation And Returns Relative To The Competition

2023-09-22 14:48:41 ET

Summary

• Dimensional International Value ETF is an actively managed fund picking value stocks in developed countries except the U.S.
• It is overweight in financials, but it is well diversified across countries and holdings.
• Valuation ratios, growth metrics, recent performance, expense ratio and turnover make it more attractive than its largest competitor.

This article series aims at evaluating ETFs (exchange-traded funds) regarding past performance and portfolio metrics. Reviews with updated data are posted when necessary.

DFIV strategy and portfolio

Dimensional International Value ETF ( DFIV ) is an actively managed fund launched on 04/16/1999 and listed as an exchange-traded fund, or ETF, on 09/13/2021. Price history is available at data providers from the latter date. DFIV has $5.9B under management, a portfolio of 496 stocks, a 12-month distribution yield of 3.96% and an expense ratio of 0.27%. Distributions are paid quarterly.

As described in the prospectus by Dimensional , the fund:

“ may overweight certain stocks, including smaller companies, lower relative price stocks, and/or higher profitability stocks within the large-cap value segment of developed ex U.S. markets. An equity issuer is considered to have a low relative price (i.e., a value stock) primarily because it has a low price in relation to its book value. In assessing relative price, the Advisor may consider additional factors such as price to cash flow or price to earnings ratios. An equity issuer is considered to have high profitability because it has high earnings or profits from operations in relation to its book value or assets. The criteria the Advisor uses for assessing relative price and profitability are subject to change from time to time. ”

The strategy description lets a lot of flexibility to managers. On the downside, it lacks of transparency. It is impossible for us to duplicate and back-test it. In the most recent fiscal year, the portfolio turnover rate was 12%, which is very low, especially for an actively managed fund.

In this article, I will use as a benchmark one of its most popular competitors: iShares MSCI EAFE Value ETF ( EFV ), which tracks the MSCI EAFE Value Index. Both are value-style funds invested in developed markets excluding the U.S., mostly in large and mega-cap companies (about 82% of asset value for DFIV, 88% for EFV). Although passively managed, EFV has a slightly higher fee (0.34%) and a higher turnover (26%).

DFIV is a bit cheaper than EFV regarding valuation ratios, as reported in the next table.

Source: Fidelity.

Moreover, it is better at finding value stocks with “good” growth: in earnings and cash flow rather than sales. The next table reports aggregate growth rates in the trailing 12 months.

Source: Fidelity.

Europe is the heaviest region in both funds, with about 58% of asset value for DFIV and 63% for EFV. The top two countries are Japan and the UK in both funds. The main difference in country allocation is the absence of Canada in EFV, whereas DFIV has almost 10% of assets in this country. DFIV is more diversified geographically. The next chart plots the top 15 countries, representing about 97% of assets. Hong Kong weighs 1.7%, so direct exposure to geopolitical and regulatory risks related to China is very low.

Financials are by far the heaviest sector in both DFIV (27.6%) and EFV (28.6%). Compared to the passive index ETF, the actively managed fund overweights energy, materials and consumer discretionary. It massively underweights utilities.

The next table lists the top 10 holdings, representing 17.2% of assets. The top name weighs about 4%, so risks related to individual companies are low to moderate.

Performance

Since DFIV listing 2 years ago, the fund has outperformed EFV by about 5% in total return. It is encouraging, but this period is too short to assess the strategy.

Takeaway

Dimensional International Value ETF is an actively managed fund picking value stocks in developed countries except the U.S. It has over 24 years of existence and almost $6B in assets, but only 2 years of data history as an ETF. Its top two countries are Japan and the U.K., and it is overweight in financials (almost 30% of assets). Otherwise, it is well diversified across countries and holdings. It is superior to the MSCI EAFE Value Index regarding valuation ratios, growth metrics and total return since listing date. Moreover, the expense ratio and turnover rate are lower than for its main competitor EFV.

All these characteristics make DFIV a good pick for value-oriented investors seeking international diversification. It has three minor shortcomings, though: a lack of transparency of the strategy, the weight of financials, and a short data history as an ETF.

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