Even some novice investors are probably familiar with the term “intrinsic value,” which is often cited by legions of professional investors, including Warren Buffett.
Investopedia defines intrinsic value as “the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.”
One important thing to remember about intrinsic value is that it may or may not be the value the market is currently assigning to a particular security. With stocks, the idea is to find those names that are currently trading at discounts to intrinsic value the new Diamond Hill Valuation-Weighted 500 ETF (NYSEArca: DHVW) can help with that objective.
The Diamond Hill Valuation-Weighted 500 ETF is the first ETF from Diamond Hill Capital Management, a unit of Diamond Hill Investment Group (NasdaqGM: DHIL), an independent investment manager with $16 billion in assets under management.
The Diamond Hill Valuation-Weighted 500 ETF tracks the Diamond Hill Valuation-Weighted 500 Index, which is comprised of approximately 500 of the largest U.S.-listed equity securities weighted by intrinsic value capitalization.
“The Index uses a proprietary, patent-pending valuation methodology developed by Diamond Hill Capital Management, Inc. to evaluate the 700 largest U.S.-listed equity securities by market capitalization. Fundamental company data and consensus earnings per share estimates are used to estimate cash flows and determine terminal value at the end of five years. Cash flows are discounted to estimate intrinsic value and determine the intrinsic value capitalization for each of the 700 companies in the starting universe. A portfolio of the 500 largest companies by intrinsic value capitalization is created, eliminating the bottom 200,” according to Diamond Hill.
DHVW’s top 10 holdings include Apple (NasdaqGM: AAPL), Microsoft (NasdaqGM: MSFT), Facebook (NasdaqGM: FB) and Johnson & Johnson (NYSE: JNJ).
“The intrinsic value calculation is designed to look beyond current market price and estimate intrinsic value based on cash flows over the next five years. This forward-looking element is an important distinction to the current price snapshot used by market capitalization-weighted indexes,” according to Diamond Hill. [Inside View of Smart Beta]
DHVW debuts at a time of increased usage of alternative indexing methodologies by institutional investors. Smart beta ETFs now account for more than $230 billion in U.S. ETF assets, nearly quadruple the number seen five years ago. [Smart Beta Boom]
DHVW charges just 0.1% per year, an expense ratio that is paltry compared to other smart beta products.
DHVW Top 10 Holdings
Table Courtesy: Diamond Hill Capital