Distillate Targets SMID-Cap Stocks With 'DSMC'

Distillate Capital, a fundamentals-driven equity manager focused on delivering highly differentiated risk-managed value investing strategies, today announced the launch of the Distillate Small/Mid Cash Flow ETF (NYSE Arca: DSMC), the newest addition to the firm’s ETF lineup built around the firm’s measures of quality, risk, and value as seen through the lens of free cash flow.

DSMC is designed to offer investors exposure to an attractively valued portfolio of approximately 150 U.S. small- and mid-cap stocks that meet specific parameters involving current and future free cash flow, valuations, and quality. The fund follows a systemized approach.

“We have been thrilled with the investor response to our first two ETFs, DSTL and DSTX, and believe now is an opportune time to expand our product lineup into the small- and mid- cap areas of the U.S. equity market, which we believe to be rife with opportunity,” said Thomas Cole, CEO of Distillate Capital, in a news release. “To this point, small- and mid-cap offerings have not taken a discerning eye to this universe of stocks, ignoring the significant dispersion to be found across valuations, high levels of leverage on the books of many names, and the fact that almost 20% of companies making up the largest small-cap index are not expected to generate positive free cash flow in the next twelve months.”

Added Cole: “Across market caps and exposures, we believe in selectivity and this category in particular requires a systematic methodology when looking at the true fundamental value factors and risks of each stock. We’re excited to be bringing DSMC to the marketplace and to continue talking with advisors and investors about modern ways to approach value investing through the lens of free cash flow.”

Distillate Capital was founded with the mission to improve value investing outcomes by employing a systematic cash flow-based valuation methodology that looks at differentiated metrics of value and quality and where they overlap to assess both valuation and risk.

The firm has often noted that due to a shift in the global economy evolution over the last 30 years, corporations and the economy overall have shifted away from the bulk of their value being derived from physical plants and tangible products (i.e. manufacturing facilities and mass production goods) to intangible assets. As that has happened, company spending has shifted from physical expenditures (which are capitalized as assets on a balance sheet) to research and development spending (which is not).

“The impact this trend has had on traditional measures of value cannot be understated,” added Jay Beidler, co-founder of Distillate. “And it has led to a belief in many corners that value investing strategies no longer work. In fact, nothing could be further from the truth; value isn’t dead, it’s just not being measured properly.”

Distillate launched its first ETF, the Distillate U.S. Fundamental Stability & Value ETF (DSTL) in late 2018. That fund has so far gathered close to $800 million in assets as of August 31. DSTL was joined in late 2020 by the Distillate International Fundamental Stability & Value ETF (DSTX), which takes a similar approach in identifying opportunities among global ex-U.S. large- and mid-cap equities.

DSMC has an expense ratio of 0.55%.

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