What is DSTL? (Pros, Cons, and Strategies)

If you're looking for diverse methods to bolster your investment portfolio, ETFs (Exchange-Traded Funds) offer a solid option, and one noteworthy candidate is DSTL. The Distillate US Fundamental Stability & Value ETF is tailored for those seeking exposure to financially resilient companies with attractive valuations. Today, we'll delve into what DSTL is, along with its advantages and disadvantages.

What is DSTL?

DSTL is an ETF that prioritizes financial stability and value. The ETF is designed to track the performance of the Distillate Fundamental Stability & Value Index, which focuses on selecting companies that exhibit robust financial health and stable earnings.

Key Features of DSTL

  • Value and Stability: Targets companies with low debt and stable earnings growth.
  • Stringent Screening Criteria: Utilizes a sophisticated valuation model to filter potential stocks based on their fundamental stability and value.
  • Diverse Sector Exposure: Ensures a balanced approach by diversifying across various sectors.

The index underlying DSTL selects companies by evaluating three critical metrics: Enterprise Value to Free Cash Flow (EV/FCF), Free Cash Flow Variability, and Debt Ratios. This thorough screening process helps in assembling a portfolio of companies that are fundamentally sound.

DSTL Composition

DSTL comprises a broad set of companies, cutting across different sectors such as healthcare, consumer goods, and industrials. Notable names in its portfolio include Johnson & Johnson (JNJ), Alphabet (GOOGL), and Microsoft (MSFT). The ETF excludes overly leveraged firms and highly volatile stocks, focusing on businesses with steady cash flows and limited debt.

Pros of DSTL

Financial Stability

DSTL's focus on financially sound companies helps mitigate market risks. By investing in companies with solid balance sheets and consistent free cash flow, DSTL aims to provide stability even in more turbulent economic times. For investors fearful of market downturns, this focus on stability can be particularly reassuring.

Valuation Focus

DSTL’s criteria for stock selection include a stringent valuation model, ensuring that investments are made in companies that are perceived to be underappreciated by the market. This could potentially offer higher returns on the premise that these undervalued companies will appreciate over time as the market corrects its valuation.

Diversification

Another significant advantage is DSTL’s diversified sector exposure. This diversification reduces the risk associated with concentrated positions in any one sector. Whether technology faces a downturn or energy prices fluctuate, DSTL’s balanced approach helps in cushioning the blow.

Cons of DSTL

Moderate Dividend Yield

While DSTL offers some level of dividend income, it may not be the primary choice for income-focused investors. The dividend yield, often around 1-2%, could be considered lower compared to other high-dividend funds like SCHD or JEPI.

Growth Limitation

Given its focus on value and stable companies, DSTL may not capture the explosive growth seen in high-flying sectors such as technology or innovative industries. This ETF might miss out on the rapid capital appreciation offered by growth-oriented ETFs or individual stocks.

Potential Overlap

For investors who already hold diversified funds or ETFs with a value tilt, DSTL could introduce some degree of redundancy. Careful portfolio analysis is required to avoid overconcentration.

DSTL Investment Strategies

DSTL, due to its focus on financial stability and value, may serve different strategic roles in an investment portfolio. Here are some approaches to consider:

Long-term Wealth Building

DSTL can be an excellent choice for long-term investors seeking portfolio stability and modest growth. By holding DSTL over an extended period, you can benefit from the compounding returns derived from stable, value-oriented companies. This strategy is ideal for retirement planning, providing a robust core holding.

Defensive Allocation

In volatile markets, DSTL's focus on financial stability can act as a defensive measure. By allocating a portion of your portfolio to DSTL, you can help insulate your investments from market swings. This strategy can be particularly beneficial during economic downturns or market corrections.

Complementing Growth Investments

DSTL can also serve as a complement to more growth-focused investments. By balancing high-growth stocks with the stability offered by DSTL, you can create a more risk-adjusted portfolio. This strategy allows you to capture growth while mitigating potential risks.

Conclusion

DSTL presents a unique blend of financial stability and attractive valuations, making it a compelling choice for various types of investors. While its moderate dividend yield and growth limitation might be drawbacks for some, its diversified and fundamentally sound approach provides ample benefits.

Whether you're planning for retirement, seeking a defensive allocation, or complementing growth investments, DSTL offers a versatile tool for achieving your financial objectives. As always, ensure that DSTL aligns with your broader investment strategy and risk tolerance before making any investment decisions.

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