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Spotlight on Two ETFs:
One Focuses on Value, the Other on Yield

Two exchange-traded funds for investors seeking value stocks or yield are spotlighted by Kyle Woodley and Nellie S. Huang, Kiplinger’s Personal Finance.

A value fund with a twist

Among the predictions for 2021 is that, after more than a decade of lagging performance, underappreciated, value-oriented stocks will finally shine brighter than growth-focused names. But what exactly constitutes value?

More than 100 ETFs with a value bent trade on U.S. exchanges today, and many of those measure stock price relative to earnings, revenues, book value or dividends to determine whether its components are “cheap.” But Distillate U.S. Fundamental Stability & Value ETF (DSTL) sees value a bit differently. “You have to measure value correctly, and that is no small thing in a world where old valuation metrics leave you comparing apples and oranges,” says Thomas Cole, co-founder of Distillate Capital.

DSTL instead relies on free cash flow (the cash profits remaining after spending to maintain or expand a business) divided by enterprise value (a measure of market value that factors in debt and cash on hand). The ETF applies this formula to a universe of 500 large stocks, then plucks out firms with high debt, as well as those with volatile cash flows. Unsurprisingly, the 100-stock portfolio that results is thick with sturdy blue chips. Perhaps more surprising is that technology is its largest sector holding.

The scoreboard doesn’t lie. In addition to strong performance compared with its peers, as determined by fund-tracker Morningstar, the fund’s 65.4% cumulative total return from its late-2018 inception has more than doubled that of traditional value funds over the same period.

Where to find yield

In a low-interest-rate world, traditional approaches to building portfolios need tweaking. Yield-hungry investors who are willing to take on extra risk should consider emerging-markets debt, particularly dollar-denominated government bonds. Vanguard Emerging Markets Government Bond Index ETF (VWOB) is a good choice.

Many emerging economies are beginning to recover post-COVID-19. That’s reflected in the recent rally in the MSCI EM index, which tracks stocks in emerging countries. Some countries in particular boast high-quality credit ratings and have been “more disciplined with monetary and fiscal policy,” adds Josh Barrickman, co-head of the U.S. bond index team at Vanguard. A weaker dollar tends to boost these bonds, too, because it lowers the cost (in local currencies) to service debt denominated in U.S. greenbacks.

All of that bodes well for this sector. But investors should expect more risk and volatility with emerging-markets debt than with, say, U.S. corporate bonds. “You’re dealing with local economies, politics and things that are often hard to predict,” says Barrickman.

The ETF is an index fund. But a team of credit analysts at Vanguard work to “avoid riskier situations,” says Barrickman, while still tracking the benchmark. In recent years, that has meant sidestepping big stakes in troubled countries such as Venezuela and Ecuador. Over the past five years, the fund has returned 4.8% – better than 44% of its peer group.

Editor’s Note: Kyle Woodley is senior investing editor at Kiplinger.com and Nellie S. Huang is senior associate editor at Kiplinger’s Personal Finance magazine, www.Kiplinger.com.

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