Daily ETF Watch: New Valuation-Based Fund

Diamond Hill rolls out its first exchange-traded fund.

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Reviewed by: Heather Bell
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Edited by: Heather Bell

Today saw the launch of the Diamond Hill Valuation-Weighted 500 ETF (DHVW), which is the first ETF from Diamond Hill Capital Management, which has $16 billion in assets under management. The investment management firm’s approach is driven by its belief in intrinsic value unrelated to stock price.

 

But perhaps even more interesting than the fund’s unique approach is the fact that this fund from a new ETF issuer costs just 1 basis point more than the SPDR S&P 500 ETF (SPY | A-98).

 

DHVW’s index methodology uses fundamentals and consensus earnings estimates to establish a company’s intrinsic value. According to the prospectus, that value is based on normalized earnings power, earnings growth rate, future dividends and terminal value.

 

The index’s selection universe consists of the 700 largest U.S.-listed stocks in terms of market capitalization, and from there the methodology selects the 500 stocks with the highest intrinsic values as the index components. It also weights the stocks by those intrinsic values.

 

DHVW is deliberately priced at 10 basis points, just 1 more basis point than SPY after a 35-basis-point waiver. That’s significant because funds from smaller first-time issuers usually come with a heftier price tag; charging only 1 extra basis point for a quasi-active strategy could give investors the incentive to take a serious look at DHVW.

 

YTD Launches

With little happening in the way of filings or launches, we’ll take a quick look at where the ETF industry stands year-to-date compared with other recent years.

 

Year-to-date, 78 ETFs have launched. That’s eight more than by this same date last year, but 31 more than the same period for 2013.

 

But don’t get too excited—these numbers aren’t unheard of. In 2012, for example, there were 108 launches by this time of year.

 

This year, at least 15 factor-focused ETFs have come to market, including the recently launched five multifactor iShares FactorSelect family of ETFs. The other noticeable trend has been in income-oriented funds, with a number of dividend-focused products hitting the market, a trend that continued from the previous year.

 

Virtus Cuts F-Squared Loose
In other news, Virtus Investment Partners Inc. has cut ties with F-Squared Partners, the ETF strategist firm that ran afoul of regulators. The companies had an exclusive agreement, with F-Squared managing five “AlphaSector” mutual fund portfolios for Virtus.

 

Those funds had accumulated more than $6 billion in assets while F-Squared was serving as its subadvisor, but they will now be rebranded as the “Virtus Trend” funds and base their strategies on Dorsey, Wright & Associates’ relative strength approach.

 

The SEC began investigating F-Squared in October 2013, and Chief Executive Officer Howard Present resigned in November 2014. The firm was hit with a $35 million fine. The fine hurt both F-Squared and Virtus—the latter’s stock price has fallen by 50 percent since the end of October 2013.

 

Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.