Volatility certainly meted out its fair share of punishment to investors after a decade-long bull run that saw major indexes like the S&P 500 reach historic levels. However, the growth-fueled investments provided by FAANG stocks can no longer be the go-to play for investors in the new year as a more risk-off sentiment is permeating the markets.
Even a stubborn Federal Reserve that was unwavering in its rate-hiking policy is starting to take note of the markets, especially after looking at a challenging 2018. The Dow fell 5.6 percent, while the S&P 500 lost 6.2 percent and the Nasdaq Composite fell 4 percent.
The central bank didn’t show much dynamism in 2018 with respect to monetary policy, obstinately sticking with a rate-hiking measure with four increases in the federal funds rate. That appears to have changed given the current market landscape as Fed Chair Jerome Powell is now preaching patience and adaptability.
“As always, there is no preset path for policy,” Powell said. “And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”
Meanwhile, investors are moving forward and looking to defensive plays to navigate 2019 and beyond. One of the ways investors are assuming a defensive stance is through value-oriented exchange-traded funds (ETFs), and one fund that views value from a different angle is the Distillate US Fundamental Stability & Value ETF (NYSEArca: DSTL).
DSTL seeks to track the performance of the Distillate U.S. Fundamental Stability & Value Index, which was developed in 2018 by Distillate Capital Partners LLC. The index uses an objective, rules-based methodology to measure the performance of U.S.-listed, large-capitalization equity securities, selected based on certain fundamental factors.
Don’t Call it a Comeback
The common notion circulating through the capital markets is that investors have flipped on the risk-off switch to focus on value is misleading, according to Thomas Cole, CFA, CEO and Co-founder of Distillate Capital. This is especially the case since the definition of value over the years has undergone its own evolution.
“There is a string of thought that ‘value’ is due to stage a comeback, and the correction in many of the FAANG stocks will now shift investors towards ‘value,'” said Cole. “The issue with this scenario is that ‘value’ as defined by the indexes and many value oriented managers still relies on price-to-book as a definition of value.”
Metrics like the price-to-book ratio, P/E ratio and price-to-sales have been hallmarks of assessing value, but Cole begs to differ on that notion, especially given the changes in the economic climate over the years.
“Some indices and many managers also include other valuation metrics like P/E and Price-to-Sales, but because the make up of the economy has changed over the past several decades and become dominated by companies generating IP and brands, those typical accounting-based definitions of value have little to do with price-to-worth, and value as defined has become a measure of asset intensity,” Cole added.
DSTL derives its definition of value from free cash flow and ignores the metrics that are rooted in accounting fundamentals to determine a company’s price-to-worth. When measured correctly, price-to-worth can provide a truer concept of value.