ETF newcomer, the Chicago based Distillate Capital is teaming up with white labeller ETF Series Solutions to list a new US large cap value ETF. The Distillate US Fundamental Stability & Value ETF (DSTL) will track an index of US large cap value companies distilled by Distillate. DSTL begins with the 500 of the largest US companies, which are then screened for value based on three things:
- Financial Indebtedness. Companies with a lot of debt are excluded.
- Fundamental Stability. Companies are scored based on a proprietary measure of the volatility of their historical and projected cash flows. Those scoring in the bottom 50% are removed.
- Valuation. Companies are scored based on a proprietary measure of free cash flow yield.
The top 100 companies (the most undervalued) that also meet the index provider’s liquidity criteria are included.
Analysis – value’s last hope
Value has been so dead for so long that some are now thinking it will never come back. Many are wondering what’s gone wrong with the value factor – has it been killed by software? By IP laws? Or was it changing accounting standards that did it?
In so far as value still has a fighting chance, we think free cash flow yield buttressed by balance sheet probes like low debt is the way to go. (The academic literature finds free cash flow a better valuation measure than book-to-price). It’s hard to fault the guys at Distillate for how they’ve crafted this investment strategy. As to how the fund performs, we’ll have to wait and see.
Photo: Thomas Cole, Source: supplied