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.
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.
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.
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