BMYMP - DSTL: A Cash Flow-Focused ETF
2023-10-10 17:16:20 ET
Summary
- Distillate U.S. Fundamental Stability & Value ETF picks stocks based on criteria including cash flow yield, cash flow stability, and debt.
- The DSTL ETF's top sectors are healthcare, technology and industrials.
- It is not only a value ETF, but also a quality ETF.
- DSTL is superior to the S&P 500 in valuation, quality and total return since November 2018.
This article series aims at evaluating ETFs (exchange-traded funds) regarding past performance and portfolio metrics. Reviews with updated data are posted when necessary.
DSTL strategy and portfolio
Distillate U.S. Fundamental Stability & Value ETF ( DSTL ) is an actively managed ETF that started investing operations on 10/23/2018. It has a portfolio of 100 stocks, a 12-month distribution rate of 1.37% an expense ratio of 0.39%. Distributions are paid quarterly.
As described by Distillate Funds ,
DSTL is designed to offer investors exposure to an attractively valued portfolio of approximately 100 U.S. large-cap stocks that meet specific parameters including free cash flow-based valuation, long-term fundamental stability and balance sheet quality.
The fund invests in large-capitalization companies, defined as “roughly 500 largest U.S.-listed companies based on free-float market capitalization.” Selection criteria include free cash flow yield, cash flow stability, and balance sheet quality. In particular, companies with significant leverage are excluded, based on a proprietary debt-to-income calculation.
The portfolio turnover rate in the most recent fiscal year was quite high: 78%. It is exclusively in U.S. companies, 57% in large and mega-cap companies and the rest in mid-caps per Fidelity classification. In this article, DSTL will be compared with the S&P 500 Index ( SPY ) and the S&P 500 Value Index, represented by SPDR Portfolio S&P 500 Value ETF ( SPYV ).
The top sectors are healthcare (23.6% of assets), technology (17.8%) and industrials (17.4%). Other sectors are close to or below 10%. Compared to SPY and SPYV, the fund massively overweights healthcare. It underweights financials and real estate and ignores utilities.
Sector breakdown (Chart: author; data: SSGA, Fidelity)
The fund is cheaper than the S&P 500 regarding aggregate price/earnings, price/sales and price/cash flow ratios, and almost on par with it in price/book. It is a bit cheaper than SPYV in price/sales and price/cash flow, close to it in price/earnings, and significantly more expensive in price/book (which is not a very reliable valuation ratio anyway).
| DSTL |
| SPY |
| SPYV |
| Price/Earnings TTM |
| 19.09 |
| 21.48 |
| 18.62 |
| Price/Book |
| 3.84 |
| 3.81 |
| 2.51 |
| Price/Sales |
| 1.66 |
| 2.44 |
| 1.77 |
| Price/Cash Flow |
| 12.16 |
| 15.07 |
| 13.02 |
Source: Fidelity.
DSTL beats SPYV in aggregate growth metrics, and it is close behind SPY.
| DSTL |
| SPY |
| SPYV |
| Earnings growth % |
| 15.95% |
| 17.73% |
| 13.27% |
| Sales growth % |
| 12.17% |
| 11.35% |
| 7.94% |
| Cash flow growth % |
| 6.02% |
| 7.89% |
| -3.98% |
The top 10 holdings, listed below with valuation ratios, represent 22% of asset value. Alphabet weighs about 4%, other constituents are below 3%. Risks related to individual companies are low to moderate.
| Ticker |
| Name |
| Weight (%) |
| P/E TTM |
| P/E fwd |
| P/Sales TTM |
| P/Net Free CashFlow |
| Yield% |
| Alphabet, Inc. |
| 4.06% |
| 29.28 |
| 24.38 |
| 6.13 |
| 6.61 |
| 24.85 |
| UnitedHealth Group, Inc. |
| 2.88% |
| 23.56 |
| 21.20 |
| 1.42 |
| 6.01 |
| 15.55 |
| Johnson & Johnson |
| 2.30% |
| 32.12 |
| 15.81 |
| 4.26 |
| 5.54 |
| 160.79 |
| AbbVie, Inc. |
| 2.11% |
| 30.62 |
| 13.48 |
| 4.71 |
| 20.52 |
| 18.21 |
| Broadcom Inc. |
| 2.01% |
| 26.41 |
| 20.33 |
| 10.31 |
| 16.55 |
| 37.11 |
| The Home Depot, Inc. |
| 1.82% |
| 18.45 |
| 19.40 |
| 1.91 |
| 221.91 |
| 36.24 |
| Cisco Systems, Inc. |
| 1.78% |
| 17.56 |
| 13.28 |
| 3.87 |
| 4.98 |
| 17.33 |
| Bristol Myers Squibb Co. |
| 1.73% |
| 15.07 |
| 7.66 |
| 2.63 |
| 3.72 |
| 19.74 |
| T-Mobile US, Inc. |
| 1.73% |
| 27.86 |
| 19.39 |
| 2.13 |
| 2.55 |
| 22.43 |
| Comcast Corp. |
| 1.56% |
| 27.96 |
| 11.64 |
| 1.53 |
| 2.19 |
| 25.66 |
Scanning portfolio quality
Ten holdings are risky regarding my preferred quality metrics. These are companies with at least two red flags among: negative ROA (return-on-assets), bad Piotroski score, bad Altman Z-score and unsustainable payout ratio, excluding financials and real estate, where these metrics are unreliable. Risky stocks weigh 8.7% of the portfolio, which is good, yet not excellent. The weighted Altman Z-score, Piotroski F-score and ROA are better than for the S&P 500 (my calculations are reported in next table).
| DSTL |
| SPY |
| Altman Z-score |
| 4.76 |
| 3.45 |
| Piotroski F-score |
| 5.99 |
| 5.64 |
| ROA % TTM |
| 9.76 |
| 7.1 |
These metrics point to a portfolio quality superior to the benchmark.
Historical performance
The next chart compares total returns since inception of DSTL, SPY, SPYV and the Invesco S&P 500 Quality ETF ( SPHQ ). DSTL is the best performer.
DSTL vs SPYV, SPHQ, SPY since inception (Seeking Alpha)
In 2023 to date, it is behind the large cap benchmark and the quality fund, but it still beats the S&P 500 Value Index.
DSTL vs SPYV, SPHQ, SPY year-to-date (Seeking Alpha)
Takeaway
Distillate Fundamental Stability & Value ETF is an actively managed fund holding 100 stocks based on criteria including cash flow yield, cash flow stability and debt. It is not only a value ETF, but also a quality ETF. Its top sectors are healthcare, technology and industrials. DSTL is superior to the S&P 500 in valuation, quality and total return since November 2018. The portfolio has a high turnover, which is not an issue in a large cap universe, especially when it comes with excess return.
For further details see:
DSTL: A Cash Flow-Focused ETF