Large Cap Value ETF Offers New Twist

October 24, 2018

Chicago-based Distillate Capital launched today a U.S. large-cap value ETF that relies on the company’s take on value and quality metrics.

The Distillate U.S. Fundamental Stability & Value ETF (DSTL), which came to market through ETF Series Solutions, an ETF trust associated with U.S. Bancorp, tracks a proprietary index that picks companies based on three fundamental measures of value, according to the prospectus:

  • Financial Indebtedness: the methodology looks to exclude companies highly leveraged based on a look at debt-to-income ratios
  • Fundamental Stability: measured as volatility of a company’s cash flows, and the 50% “least stable” are excluded
  • Valuation: measured as a company’s free cash flow yield, and only the 100 “most undervalued” are included in the index

Being a value investor has not been easy in recent years, but Distillate argues that a fresh look at how to measure value and quality is the way to capture outsized returns going forward.

“Value investing isn’t dead,” Distillate Capital Co-founder and CEO Tom Cole said in a release. “Far from it.”

“Value investing works by exploiting behavioral biases, which are well-documented and recurring; the problem lies in how ‘value’ is defined,” he added. “What we’ve observed as fundamental analysts going back to the 1980s is that many traditional valuation metrics have become increasingly ineffective as tools for comparison as the economy has evolved from physical assets to intellectual ones.” 

DSTL is listed on NYSE Arca and costs 0.39% in expense ratio, or $39 per $10,000 invested.

 

Portfolio At A Glance:

Source: Distillate Capital

 

DSTL will go head to head with some 60 value ETFs in a segment led by some mega funds such as the $43 billion Vanguard Value ETF (VTV)—which costs only 0.05%—and the $36 billion iShares

Russell 1000 Value ETF (IWD), at 0.20% in expense ratio. Value ETFs, as a group, command roughly $183 billion in combined assets today. 

In the past year, value funds have largely underperformed the U.S. large-cap segment, as measured by the SPDR S&P 500 ETF Trust (SPY):

 

Chart courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]

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