Becoming an Investor

DSTL: A Value Fund With a Twist

The fund’s 51.3% return since its inception in 2018 has more than tripled that of traditional value funds.

Among the predictions for 2021 is that, after more than a decade of lagging performance, underappreciated, value-oriented stocks will finally shine brighter than growth-focused names. But what exactly constitutes value?

More than 100 exchange-traded funds with a value bent trade on U.S. exchanges today, and many of those measure stock price relative to earnings, revenues, book value or dividends to determine whether its components are “cheap.” But Distillate U.S. Fundamental Stability & Value (symbol DSTL) sees value a bit differently. “You have to measure value correctly, and that is no small thing in a world where old valuation metrics leave you comparing apples and oranges,” says Thomas Cole, CEO and cofounder of ETF provider Distillate Capital.

DSTL instead relies on free cash flow (the cash profits remaining after spending to maintain or expand a business) divided by enterprise value (a measure of market value that factors in debt and cash on hand). The ETF applies this formula to a universe of 500 large stocks, then plucks out firms with high debt, as well as those with volatile cash flows. Unsurprisingly, the 100-stock portfolio that results is thick with sturdy blue chips. Perhaps more surprising is that technology is its largest sector holding.

The scoreboard doesn’t lie. In addition to strong performance compared with its peers, as determined by fund-tracker Morningstar, the fund’s 51.3% cumulative total return since its late-2018 inception has more than tripled that of traditional value funds, such as the Vanguard Value ETF and iShares Russell 1000 Value ETF, over the same period.

DSTL chart with returns

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