ETF Talk: Vying for Value with DFNL

Arthur Miller, the famous 20th-century American playwright and essayist, is quoted as saying: “Don’t be seduced into thinking that that which does not make a profit is without value.”

I happen to find that this quote can be applied to a multitude of things, such as friendship, experiences, education and, to stay on theme with this month’s exchange-traded fund categories, so-called out-of-favor financial ETFs. Let me preface this by saying that we are not taking Miller’s quote literally in this case, as profit is probable, but we are certainly looking at a more value-based play here.

So, let’s dive into the world of value-focused investing with a practical play on the financial sector. For investors willing to take a patient, contrarian stance, this fund is built around the idea that today’s overlooked financial companies could become tomorrow’s outperformers.

The Davis Select Financial ETF (NYSEArca: DFNL) is an actively managed ETF that invests primarily in financial services companies, including banks, insurance firms and asset managers. Unlike passively managed funds that merely track an index, DFNL takes a flexible and high-conviction approach in choosing a smaller number of companies the managers believe are undervalued and have strong, long-term potential. This allows the fund to focus on quality businesses rather than just the largest names in the sector.

Importantly, the fund’s holdings have historically shown a mix of reasonable valuations and solid growth potential, which is the essence of value investing. Investors are not just buying cheap stocks — they are buying businesses that can continue to grow, while also benefiting if the market starts to recognize their true worth.

Now, as I mentioned earlier, there is a theme here with “out-of-favor” financial ETFs — but let me explain what this means, as I surely would never intend to send any of my readers in the wrong direction. The “theme,” so to speak, is key to the investment argument with this specific fund as financial stocks have faced pressure due to concerns about interest rates, the economy and regulation. As a result, many high-quality companies are trading at relatively low valuations compared to their long-term earnings potential. DFNL is designed to take advantage of this gap — buying solid companies when sentiment is weak, with the expectation that prices will recover over time.

Digging into the financials, the fund has $444.45 million in net assets and $485.25 million in assets under management. The double-edged sword comes in the form of DFNL’s expense ratio, which is a bit on the pricier side, coming in at 0.61%. But remember, this is an actively managed fund that is being closely monitored. On the flipside, investors will be seeing both value and profit with the fund’s annual dividend yield of 1.47% — roughly $0.66 per share.

Courtesy of Stockcharts.com

The chart above is the perfect time to loop back to Miller’s quote — immediate profits may not be the play here, but value certainly is. The fund has experienced solid growth year to date; and while it experienced a sharp dip at the tail-end of March, it swiftly recovered and climbed almost all the way back up to the highest end of its 52-week range at $50.59. Currently, DFNL is holding around the $48 mark, but that is nothing to scoff at — as it speaks to a certain level of stability.

The fund’s portfolio is fairly concentrated, with a holding of usually only 20-35 stocks at a time — this is a reflection of DFNL’s “best-ideas” strategy. Its top 10 holdings include Capital One Financial Corporation (COF), 9.75%; Berkshire Hathaway Inc. (BRK-B), 5.87%; U.S. Bancorp (USB), 5.54%; Fifth Third Bancorp (FITB), 5.20%; Markel Group Inc. (MKL), 5.03%; Chubb Limited (CB), 4.93%; Wells Fargo & Company (WFC), 4.91%; The PNC Financial Services Group, Inc. (PNC), 4.80%; JPMorgan Chase & Co. (JPM), 4.36% and Julius Bär Gruppe AG (BAER.SW), 4.22%.

Ultimately, DFNL is best suited as a long-term, value-oriented investment in a currently overlooked sector. It combines disciplined stock selection with a willingness to go against market sentiment — making it a strong option for investors who believe financial stocks are undervalued and positioned for a rebound over time.

Remember, investors should always do their due diligence and consider how any stock, fund or ETF fits within their personal goals and overall strategy before adding it to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.