Distillate Capital unveils global ex-US ‘Stability & Value’ ETF

Dec 24th, 2020 | By | Category: Equities

Chicago-based Distillate Capital has introduced its second ETF with the launch of a global ex-US equity fund that invests in stocks where quality and value factors overlap.

Tom Cole, co-Founder and CEO, Distillate Capital

Tom Cole, co-Founder and CEO, Distillate Capital.

The Distillate International Fundamental Stability & Value ETF (DSTX US) has listed on NYSE Arca and comes with an expense ratio of 0.55%.

The fund is linked to the proprietary Distillate International Fundamental Stability & Value Index which selects its constituents from a universe of developed and emerging market stocks outside the US with market capitalizations above $5 billion and average daily trading values greater than $20 million.

According to Distillate, the starting universe consists of approximately 1,500 non-US large- and mid-cap stocks.

The index uses Distillate’s own definitions of value and quality factors within its selection process. This involves making a number of balance sheet adjustments to enhance the comparability of factors across firms.

The methodology first excludes those stocks with significant leverage based on the firm’s proprietary debt-to-income ratio that adjusts for off-balance sheet leases or other calls on capital that may not be picked up by traditional measures.

Each company is then scored based on a proprietary measure of the volatility of its historical and projected cash flows as an indicator of fundamental stability. Distillate utilizes a cash-based proprietary measure called ‘distilled cash yield’ which it says restores comparability between older, more physical asset-based companies and newer, more research and development-oriented ones. The bottom two-thirds (i.e. the least stable) based on this measure are excluded.

Finally, each company is scored based on a proprietary measure of the company’s free cash flow yield (a measure comparing a company’s normalized free cash flow to its enterprise value). Distillate’s proprietary metric seeks to address the perceived ineffectiveness of traditional valuation methods which stem from the differing accounting treatment of intangible and physical assets.

The top 100 companies (the most undervalued) based on Distillate’s value metric are included in the index.

Each stock is weighted based on the sum of two-thirds of its equal weighting weight and one-third of its proportion of the index’s total normalized cash flow. The weighting process also limits the weight of major geographic regions (Americas, Europe, Middle East & Africa, Japan, China/Hong Kong, and Asia & Australia) to 150% of their weight in the parent universe.

The index is reconstituted and rebalanced quarterly with buffer rules helping to limit unnecessary turnover.

As of mid-December, the largest country exposures are China/Hong Kong (18.3%), Japan (12.3%), Canada (9.6%), the UK (8.8%), and Switzerland (7.1%). The largest holdings include Alibaba (4.8%), Samsung (4.7%), Roche (3.6%), Nestle (2.7%), and KDDI (1.8%).

Tom Cole, co-Founder and CEO of Distillate Capital, commented, “Contrary to popular belief, value investing is alive and well. Old metrics like price-to-book and price-to-earnings have become convoluted by accounting changes and are outdated for today’s companies due to a significant shift over recent decades toward an economy driven by intangible assets.”

The fund complements the firm’s inaugural ETF – the Distillate US Fundamental Stability & Value ETF (DSTL US) – which utilizes the same investment approach on the universe of US large-cap companies. It comes with an expense ratio of 0.39% and has grown to over $200 million in assets under management.

DSTL has outperformed the market since its inception in October 2018, providing an annualized return of 15.54% compared to 13.37% for the S&P 500 and just 1.68% for the Russell 1000 Value Index.

Cole added, “We have been pleased with DSTL’s performance. With DSTX, we are taking the same approach to international stocks that we use to manage DSTL, where we are building a solid proof statement that value-driven investing, when valuation is measured accurately, is still a very good way to generate better than market returns for clients. We believe just as much potential for outperformance exists internationally.”

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