Value-related funds and ETFs are finally getting noticed after more than a decade of underperformance. The S&P Large-cap 500/Citigroup Value Index (SVX) has appreciated 13.69% year-to-date and 37.22% over the past year. The counterpart S&P Large-cap 500/Citigroup Growth Index (SGX) has gained 9.50% year-to-date and 51% over the past year.
The underappreciated value-oriented stocks are beginning to attract investment interests, at least from a near-to-medium term perspective. However, the question remains – is this trend sustainable longer-term, and most importantly, what constitutes value?
Today, fundamental valuation metrics such as price relative to earnings, book value, revenues, or dividends often determine whether a stock is a value or growth. If the fundamentals are cheap, then these stocks are placed in the value category.
With the COVID-19 pandemic, changes in accounting rules, the acceleration of the stay-at-home trend, and numerous innovations, it has become increasingly challenging to determine value versus growth stocks in this new market environment. The old way of valuing stocks may not apply, leaving investors comparing apples to oranges.
More than 100 value ETFs are available today. Most select value stocks on the traditional valuation metrics of value, quality, and risk. A new ETF was introduced two years ago - Distillate U.S. Fundamental Stability and Value ETF (DSTL).
DSTL focus on free cash flow or the cash profits after spending divided by enterprise value or a market value that factors in debt and cash to identify cheap value stocks. They apply the above valuation metrics across the universe of 500 large-cap stocks, eliminating companies with high debt and volatile cash flows. The final 100 stock portfolio consists of solid blue-chip value names.
DSTL largest sector weights are Technology (25.83%), Industrials (22.19%), Healthcare (16.88%), and Consumer Defensive (14.09%). The top 10 holdings or 20.24% of total assets are INTC (2.46%), JNJ (2.43%), GOOGL (2.27%), UNH (2.24%), WMT (2.02%), CSCO (1.85%), HD (1.82%), PG (1.77%), AVGO (1.73%), and ORCL (1.65%).
Surprisingly, a quarter of the overall assets is the Technology sector. Five of the top ten positions in the portfolio are also large-cap technology names. It is also interesting GOOGL, a popular growth technology name, made it to the top-10 list. Since DSTL has many blue-chip value technology names, this ETF may appeal to long-term investors that believe in the technology revolution and innovations but prefer not to chase the higher beta, momentum type technology names.
The scoreboard does not lie. The relative outperformance since October 2018 inception against the traditional value funds, including the larger Vanguard Value ETF (VTV), iShares S&P 500 Value ETF (IVE), and iShares Russell 1000 Value ETF (IWD), is impressive.
Time will tell whether this trend will continue and DSTL becomes the benchmark valuation metrics for future value ETFs.