DSMC: Small/Mid Cap Cash Flow ETF With Strong Quality And Value Features

seekingalpha08-01

DSMC is a small/mid-cap cash flow ETF focusing on quality and value factors with unique selection criteria. Its ER is 0.55% and the fund has $104 million in assets.My analysis reveals substantially ...

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Its ER is 0.55% and the fund has $104 million in assets.My analysis reveals substantially ...</p>\n\n<a href=\"https://seekingalpha.com/article/4708811-dsmc-small-mid-cap-cash-flow-etf-with-strong-quality-value-features\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>DSMC: Small/Mid Cap Cash Flow ETF With Strong Quality And Value Features</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nDSMC: Small/Mid Cap Cash Flow ETF With Strong Quality And Value Features\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-01 08:20 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4708811-dsmc-small-mid-cap-cash-flow-etf-with-strong-quality-value-features><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>DSMC is a small/mid-cap cash flow ETF focusing on quality and value factors with unique selection criteria. Its ER is 0.55% and the fund has $104 million in assets.My analysis reveals substantially ...</p>\n\n<a href=\"https://seekingalpha.com/article/4708811-dsmc-small-mid-cap-cash-flow-etf-with-strong-quality-value-features\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"TOL","symbol_name":"托尔兄弟","start_time":0,"source_url":"https://seekingalpha.com/article/4708811-dsmc-small-mid-cap-cash-flow-etf-with-strong-quality-value-features","article_id":"2456111967","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1442650775/image_1442650775.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2456111967","pubTimestamp":1722471620,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"DSMC is a small/mid-cap cash flow ETF focusing on quality and value factors with unique selection criteria. Its ER is 0.55% and the fund has $104 million in assets.My analysis reveals substantially be","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"TOL":"托尔兄弟","BK4180":"家用器具与特殊消费品","SMCF":"THEMES US SMALL CAP CASH FLOW CHAMPIONS ETF","IWN":"罗素2000价值股指数ETF-iShares","NWL":"纽威","SFLO":"VICTORYSHARES SMALL CAP FREE CASH FLOW ETF","FDN":"First Trust Dow Jones Internet I","CALF":"Pacer US Small Cap Cash Cows 100 ETF","BK4585":"ETF&股票定投概念","DSMC":"Distillate Small/Mid Cash Flow ETF","BK4190":"消闲用品","VSTO":"Vista Outdoor Inc","LU0054578231.USD":"BGF SYSTEMATIC SUSTAINABLE GLOBAL SMALLCAP \"A2\" (USD) ACC","BK4588":"碎股","BK4550":"红杉资本持仓","BK4088":"住宅建筑"},"translate_title":"DSMC：具有强大质量和价值特征的中小盘现金流ETF","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CALF":1,"DSMC":1,"FDN":1,"IWN":1,"NWL":1,"SFLO":1,"SMCF":1,"TOL":1,"VSTO":1},"content_text":"DSMC is a small/mid-cap cash flow ETF focusing on quality and value factors with unique selection criteria. Its ER is 0.55% and the fund has $104 million in assets.My analysis reveals substantially better quality metrics compared to the Russell 2000 Value ETF almost across the board. DSMC's 12.46x forward P/E is particularly appealing.However, other cash-flow-based ETFs like CALF, SFLO, and SMCF arguably have better fundamentals. DSMC's constituents also have negative earnings growth, which explains why it's lagged YTD.DSMC looks solid and is a substantial improvement over low-cost funds like IWN, but is not the best choice at this time. As such, I've assigned it a \"hold\" rating.   Seiya Tabuchi vistInvestment Thesis The Distillate Small/Mid Cash Flow ETF (DSMC) seeks to provide small-cap investors with consistent exposure to the quality and value factors using proprietary cash-flow-based criteria. It sounds promising, but several competitors in the space follow a similar theme, so I'd like to describe what makes DSMC different and decide whether it's worth a purchase. I hope you enjoy the read. DSMC Overview Strategy Discussion According to its fund page, DSMC \"begins with a starting universe of around 1,000 profitable small- and mid-cap U.S. stocks. Then, Distillate Capital eliminates securities with high debt loads and selects 150 of the most attractively value stocks based on a normalized free cash flow methodology. Finally, securities are weighted based on free cash flow generation, and the portfolio rebalances quarterly. The prospectus provides some additional color. All securities must be headquartered in the United States, have sufficient liquidity, have reported free cash flow data for the last three years, and have a forward EBITDA estimate. Securities with negative one-year estimated free cash flows from FactSet Research Systems are not eligible, and Distillate uses free cash flow yield (normalized free cash flow to enterprise value) as its primary valuation tool. Here are a few of my initial takeaways: 1. The initial profitability screen is essential, but please note that EBITDA and not GAAP earnings are used to gauge profitability. Furthermore, Distillate relies on consensus estimates rather than historical results. That's generally my preference, especially with small—and mid-cap stocks that aren't mature. However, I also don't see a problem incorporating historical results into the equation, especially since the advisor requires at least three years' worth of free cash flow data. 2. I appreciate the focus on debt and how Distillate aims to avoid over-leveraged companies. Debt can become burdensome if interest rates stay higher for longer, and we often see this manifest through low interest coverage ratios (EBITDA / Interest Expenses). 3. 150 securities should provide ample diversification at the company level. However, there was no mention of weight caps by sector or industry. This may be problematic in the future, but I'll evaluate diversification in a couple of different ways shortly. 4. Quarterly rebalances are common for free cash flow yield strategies, and one example is the VictoryShares Small Cap Free Cash Flow ETF (SFLO). The rebalancing frequency increases portfolio turnover, so you might find it challenging (or interesting) to keep up with the changes each quarter. However, one advantage is that it ensures consistent exposure to the quality and value factors.  My first impression is positive, but as I mentioned, several competitors exist. In addition to SFLO, I will compare DSMC against the Pacer US Small Cap Cash Cows 100 ETF (CALF), the Themes US Small Cap Cash Flow Champions ETF (SMCF), and the iShares Russell 2000 Value ETF (IWN). Performance Analysis Since November 2022, DSMC has gained 42.59% compared to 31.11% and 21.71% for CALF and IWN, respectively. Importantly, it generated these returns with less volatility, leading to even better risk-adjusted returns (Sharpe Ratio). Downside risk-adjusted returns (Sortino Ratio) were also excellent, as DSMC declined by only 10.65% between February and May 2023. This is precisely what you hope to see - an ETF that can outperform in bull and bear markets, and I suspect its quality focus is a big reason why. Portfolio Visualizer Still, SFLO and SMCF have outperformed since they launched late last year. The following table highlights their superior 11.11% and 16.18% YTD returns, and although this measurement period is too short to draw any conclusions, the large gap in returns suggests these ETFs have significantly different strategies despite following a similar cash flow theme. Portfolio Visualizer DSMC Analysis Diversification Analysis vs. CALF, SFLO, SMCF, and IWN You may be surprised that DSMC has only 23.46%, 36.78%, and 16.84% overlap with CALF, SFLO, and SMCF, respectively. Overlap with IWN is even less at 9.52%, so at minimum, DSMC offers something different. Here's a list of its top 25 holdings and weights compared to its peers: The Sunday Investor Diversification at the company level is solid, with only 28.88% allocated to these top 25 holdings. SFLO is similarly well-diversified at 28.59%, while CALF and SMCF are more concentrated at 44.14% and 66.14%, respectively. Diversification is essential, as it increases the chances of consistent annual returns. This year, we've seen CALF fall out of favor, and under different market conditions, the same is possible for SMCF. DSMC's diversification looks less impressive at the sector level, with three sectors (Consumer Discretionary, Energy, and Industrials) accounting for two-thirds of the portfolio. However, CALF and SFLO have 63% and 66% allocated to these sectors, revealing how these ETFs are pretty similar at a high level. Instead, we'll need to focus on the differences in stock selection within each sector. For example, DSMC is betting Toll Brothers (TOL) will outperform Newell Brands (NWL) and Vista Outdoor (VSTO), which are top Consumer Discretionary holdings in CALF and SFLO, and for what it's worth, TOL does have the best Seeking Alpha Quant Score. The Sunday Investor To rank ETFs, I use sub-industry-level diversification as a compromise between company- and sector-level diversification. In the small-cap value category, DSMC's #24/37 ranking is slightly below average but better than its cash-flow peers, as follows:  CALF: #29/37 SFLO: #28/37 SMCF: #36/37  I think the best approach to these types of ETFs is to treat them as satellite investments or plan to hold them for the medium-long term. They will likely underperform the market substantially at least once in the next few years, but what's key is that they all emphasize quality, and quality stocks tend to outperform over more extended periods. DSMC Fundamentals By Sub-Industry The following table highlights selected fundamental metrics for DSMC's top 25 sub-industries, which total 73.74%. Per the rankings listed earlier, this concentration level is less than CALF, SFLO, and SMCF but about 14% more than IWN, whose category diversification rank is #6/37. The Sunday Investor A few observations: 1. All four cash flow ETFs have above-average volatility. DSMC's five-year beta is 1.35, primarily due to its 11.91% position in Oil & Gas Exploration & Production stocks. I ran a three-year backtest of the 16 stocks it currently holds, set to rebalance quarterly, and saw they declined by 22.98% in June 2022 compared to a 9.90% decline for IWN. Crude Oil Futures peaked the month prior, and this hypothetical portfolio didn't recover until August 2023. Portfolio Visualizer High exposure to Energy stocks is something to be aware of with these types of ETFs. My view is that oil prices are too difficult to predict accurately, but at the same time, relying on historical price movements is no better. It's a blind spot for investors, but DSMC's 18.81% total Energy sector exposure isn't too much different than its peers. 2. DSMC appears to have similar quality features to CALF, SFLO, and SMCF. Its 7.17/10 profit score, which I calculated using Seeking Alpha Profitability Grades, is right in between CALF and SFLO and 0.29 points below SMCF, likely because of its lower market cap ($5.06 vs. $9.90 billion). DSMC's 21.76x weighted average interest coverage ratio is excellent and more than double IWN's, which will be one reason it outperforms moving forward. Finally, DSMC's free cash flow margins are also solid at 12.23%, more than 8% better than IWN, and it also scores well on most other quality metrics, as follows: The Sunday Investor 3. DSMC is designed for quality and value investors, but it's difficult to ignore its negative estimated earnings per share growth rate. At -1.93%, DSMC's 15.60x forward earnings valuation (12.46x harmonic average) is cheap for a good reason, though still more expensive than its peers. I'm confident poor growth is why DSMC has lagged behind this year, and to demonstrate, consider the following backtested returns for the 24 stocks with \"F\" Seeking Alpha Growth Grades. Portfolio Visualizer These stocks declined by 10.08% in April, which is likely how they qualified in the first place. However, unlike June and September 2022, these stocks didn't rebound quickly in subsequent months. You should be cautious when investing in funds with no growth because you're effectively expressing a strong belief the market has made a mistake that will be rectified quickly. Value investing doesn't always work that way, and plenty of patience is typically required. As it stands, DSMC's 5.09/EPS Revision Score, which ranks #896/934 among all the ETFs I track, suggests you shouldn't hold your breath for a reversal. Investment Recommendation DSMC is a cash-flow-based fund that provides small-cap investors with consistent exposure to quality and value factors. My fundamental analysis confirmed it comes as advertised, and compared to peers like CALF, SFLO, and SMCF, DSMC is reasonably well-diversified, with only 29% of assets in its top 25 holdings. I also like how DSMC avoids over-leveraged companies and expect it to easily outperform many low-cost alternatives.  CALF, SFLO, and SMCF arguably have stronger fundamentals than DSMC. I found these ETFs had similar quality and value metrics but trade at more attractive valuations and, in the case of SFLO, a much better earnings growth rate. Due to these differences, I've only assigned DSMC a \"hold\" rating, but I think it's one to watch, and I look forward to any questions you might have in the comments below. 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