Investment advisor: Dimensional Fund Advisors LP
Launch date: November 2, 2022
Expense ratio: 0.24%
Investment objective:
The investment objective of the Dimensional International Sustainability Core 1 ETF (the “International Sustainability ETF” or “Portfolio”) is to achieve long-term capital appreciation.
Fundamental investment strategy:
To achieve the International Sustainability ETF’s investment objective, the Advisor implements an integrated investment approach that combines research, portfolio design, portfolio management, and trading functions. As further described below, the Portfolio’s design emphasizes long-term drivers of expected returns identified by the Advisor’s research, while balancing risk through broad diversification across companies and sectors. The Advisor’s portfolio management and trading processes further balance those long-term drivers of expected returns with shorter-term drivers of expected returns and trading costs.
The Portfolio is designed to purchase a broad and diverse group of securities of non-U.S. companies in developed markets. The Portfolio invests in companies of all sizes, with increased exposure to smaller capitalization, lower relative price, and higher profitability companies as compared to their representation in the International Universe, while adjusting the composition of the Portfolio based on sustainability impact considerations. For purposes of this Portfolio, the Advisor defines the International Universe as a market capitalization weighted set (e.g., the larger the company, the greater the proportion of the International Universe it represents) of non-U.S. companies in developed markets that have been authorized as approved markets for investment by the Advisor’s Investment Committee. The Portfolio’s increased exposure to smaller capitalization, lower relative price, and higher profitability companies may be achieved by decreasing the allocation of the Portfolio’s assets to larger capitalization, higher relative price, or lower profitability companies relative to their weight in the International Universe. An equity issuer is considered to have a high relative price (i.e., a growth stock) primarily because it has a high price in relation to its book value. 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 Portfolio intends to purchase securities of companies associated with developed market countries that the Advisor has designated as approved markets. As a non-fundamental policy, under normal circumstances, the Portfolio will invest at least 80% of its net assets in equity securities. The Advisor determines company size on a country or region specific basis and based primarily on market capitalization. The percentage by which the Portfolio’s allocation to securities of the largest high relative price companies is reduced will change due to market movements, sustainability impact considerations and other factors. Additionally, the representation of securities in the Portfolio as compared to their representation in developed non-U.S. markets may be impacted by the Portfolio’s sustainability impact considerations.
The Advisor may also increase or reduce the Portfolio’s exposure to an eligible company, or exclude a company, based on shorter-term considerations, such as a company’s price momentum and investment characteristics. In assessing a company’s investment characteristics, the Advisor considers ratios such as recent changes in assets divided by total assets. The criteria the Advisor uses for assessing a company’s investment characteristics are subject to change from time to time. In addition, the Advisor seeks to reduce trading costs using a flexible trading approach that looks for opportunities to participate in the available market liquidity, while managing turnover and explicit transaction costs.
The Portfolio may gain exposure to companies associated with approved markets by purchasing equity securities in the form of depositary receipts, which may be listed or traded outside the issuer’s domicile country. The Portfolio may purchase or sell futures contracts and options on futures contracts for foreign or U.S. equity securities and indices, to increase or decrease equity market exposure based on actual or expected cash inflows to or outflows from the Portfolio. Because many of the Portfolio’s investments may be denominated in foreign currencies, the Portfolio may enter into foreign currency exchange transactions, including foreign currency forward contracts, in connection with the settlement of foreign securities or to transfer cash balances from one currency to another currency. The above-referenced investments are not subject to, although they may incorporate, the Portfolio’s sustainability impact considerations.
The Portfolio may lend its portfolio securities to generate additional income.
Sustainable investing approach:
The Advisor intends to take into account the impact that companies may have on the environment and other sustainability considerations when making investment decisions for the Portfolio. Relative to a portfolio without these considerations, the Portfolio will exclude or underweight securities of companies that, according to the Portfolio’s sustainability impact considerations, may be less sustainable as compared either to other companies in the Portfolio’s investment universe or other companies with similar business lines. Similarly, relative to a portfolio without sustainability impact considerations, the Portfolio will overweight securities of companies that, according to the Portfolio’s sustainability impact considerations, may be more sustainable as compared either to other companies in the Portfolio’s investment universe or other companies with similar business lines. In considering sustainability impact and other factors that the Advisor believes may be important to investors, the Advisor will consider greenhouse gas emissions intensity, fossil fuel reserves, coal, land use, water use, factory farming activities, biodiversity, involvement in toxic spills or releases, operational waste, tobacco, palm oil, cluster munitions manufacturing, landmine manufacturing, civilian firearms manufacturing, the ownership or operation of private prisons and/or immigrant detention facilities, child labor, and severe environmental, social, or governance controversies, among other factors. In particular, the Portfolio will exclude companies the Advisor considers to have high greenhouse gas emissions intensity or fossil fuel reserves relative to other issuers. The Advisor may engage third party service providers to provide research and/or ratings information relating to the Portfolio’s sustainability impact considerations with respect to securities in the portfolio, where information is available from such providers.
The Portfolio may periodically modify, add, or remove certain sustainability impact considerations.
The Portfolio is an actively managed exchange traded fund and does not seek to replicate the performance of a specific index and may have a higher degree of portfolio turnover than such index funds.
APPLYING THE PORTFOLIOS’ SUSTAINABILITY IMPACT CONSIDERATIONS
The Advisor intends to take into account the impact that companies have on the environment and other sustainability considerations when making investment decisions for the Portfolios. Relative to a portfolio without these considerations, a Portfolio will generally exclude or have less weight in securities of companies that, according to the Portfolios’ sustainability impact considerations, may be less sustainable as compared either to other companies in the Portfolios’ investment universe or other companies with similar business lines. Similarly, relative to a portfolio without sustainability impact considerations, the Portfolios will generally have a higher weight in securities of companies that, according to the Portfolios’ sustainability impact considerations, may be more sustainable as compared either to other companies in the Portfolios’ investment universe or other companies with similar business lines. As of the date of this Prospectus, MSCI ESG Research LLC and Institutional Shareholder Services Inc. have been engaged by the Advisor as the Portfolios’ primary providers of research and/or ratings information relating to the sustainability impact considerations with respect to corporate securities in the portfolios, where information is available from such providers. The Trust or Advisor may also change or engage additional independent third party service providers from time to time.
Selected examples of the types of considerations that are expected to be used to evaluate companies’ impact on the environment and other sustainability considerations are as follows:
Greenhouse gas emissions intensity or fossil fuel reserves: The greenhouse gas emissions intensity consideration looks at a company’s greenhouse gas emissions scaled by sales. Greenhouse gases included are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3).
Land use and biodiversity: This consideration looks to the severity of controversies related to a firms’ use or management of natural resources.
Cluster munitions or landmine manufacturing: This consideration takes into account the firm’s involvement in the manufacture of cluster munitions, landmines, or the essential components of these products.
Civilian firearms manufacturing: This consideration relates to companies that earn revenue from the production and/or manufacturing of civilian firearms.
Toxic spills and releases: Factors affecting this evaluation include, but are not limited to, a history of involvement in land or air emissions-related litigation, widespread or egregious impacts due to hazardous emissions or waste, criticism by non-governmental organizations and/or other third parties.
Operational waste: This consideration relates to controversies involving the impact of the firm’s non-hazardous operational waste.
Water use: This consideration relates to the firm’s water management practices.
Tobacco: This consideration relates to companies with meaningful revenue related to tobacco products.
Palm oil: This consideration relates to companies with meaningful revenue related to the farming and/or processing of palm oil.
Coal: This consideration relates to companies that have coal reserves.
Private prisons and/or immigrant detention facilities: This consideration relates to companies that own or operate private prisons and/or immigrant detention facilities.
Child labor: This consideration relates to companies that have had major recent child labor controversies in their own operations or supply chain.
Factory farming: This consideration relates to companies that are believed to be using particular intensive methods of livestock rearing.
Severe environmental, social or governance controversies: This consideration looks at companies involved in severe and material environmental, social or governance controversies relating to one or more of the Portfolios’ sustainability considerations listed above.
The sustainability impact considerations listed above are examples of factors that the Advisor believes may indicate whether or not a company, as compared to other companies with similar business lines, promotes sustainability by pursuing economic growth and development that meets the needs of the present without compromising the needs of future generations. The Portfolios may periodically modify, add, or remove their sustainability impact considerations.
For each Portfolio, based on the research and ratings information, the Advisor will determine an overall impact score for the company and will consider the overall impact score of the issuer relative to other issuers when determining whether a security should: (i) be excluded from a Portfolio’s securities holdings; (ii) have its weight decreased within the Portfolios; (iii) be held with no adjustment to its weight within the Portfolios; or (iv) have its weight increased within the Portfolios. The Advisor may also exclude, decrease or increase the weight of specific companies due to any specific factor.
As described above, the Advisor will endeavor to consider the sustainability impact of each company when constructing a Portfolio’s investment portfolio. However, the Advisor may not be able to assess the sustainability impact of each company eligible for purchase by a Portfolio. For example, the Advisor may not be able to determine an overall sustainability impact score for each company based on the sustainability considerations described above because the third party service providers may not have data on the entire universe of companies considered by the Advisor for the Portfolios, or may not have information with respect to each factor listed above as a sustainability impact consideration. The sustainability impact of a company may change while the Portfolios are holding the company’s securities due to actions taken by the company or new information that becomes available concerning the company, and such information may impact the Portfolios’ decision to buy securities in the future of such company but will not necessarily result in changes to current holdings of such company. For instance, if negative information about a company becomes available, while future investment decisions should reflect that information, the Portfolios may continue to hold the securities it already owns in the short or long term, so that the composition of the Portfolios may not, at all times, reflect the most current sustainability impact considerations. The Portfolios’ exposure to companies, industries and sectors of the market may be affected by sustainability impact data obtained that may not be completely accurate with respect to any company or by a given sustainability factor that may not be as relevant as assumed in the overall score. Further, in addition to excluding or underweighting securities of corporate issuers based upon the sustainability impact considerations, the Global Sustainability Fixed Income ETF also will generally exclude or underweight securities of supranational organizations and certain non-sovereign governmental agencies (both U.S. and non-U.S.) that may be less sustainable as compared to other similar issuers, based upon the sustainability impact considerations. The Global Sustainability Fixed Income ETF’s investments in securities of U.S. and non-U.S. sovereign issuers are not subject to the sustainability impact considerations. The Advisor, however, considers securities issued by the U.S. Treasury and certain U.S. agencies and instrumentalities that are not subject to the sustainability impact considerations to be consistent with the Global Sustainability Fixed Income ETF’s strategy of investing in sustainable investments.
Because the Advisor takes into account sustainability impact considerations when constructing the investment portfolio, a Portfolio may not invest in, or may deviate in its exposure to, certain types of companies, industries, and segments of the designated markets in which similar portfolios without sustainability impact considerations invest.
Each Portfolios’ sustainability impact considerations are designed to meet the investing needs of shareholders; the exclusion, purchase, or sale of specific securities in a Portfolio should not be construed as reflecting a judgment by the Advisor or the Board of Trustees of the Trust relating to any sustainability issue.
Notes of Explanation: For mutual funds, expense ratio may vary by share class and launch date applies to the launch date of the earliest share class. Sources: Fund prospectus or other offering document, as disclosed.
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