Dodd Kittsley, CFA, National Director for Davis Funds, joined Keith Black, Managing Director of RIA Channel, to discuss an active ETF that invests in quality growth companies with a value discipline.
Davis Funds was early to launch active ETFs. Financial advisors who had clients invested in Davis Funds’ SMAs and active mutual funds asked to invest in an ETF format. These advisors recognize that ETFs can offer active investment strategies at lower costs along with greater transparency and tax efficiency.
In 2017, Davis Funds launched one of the first actively managed ETFs, porting a decades-long investment strategy into a new investment vehicle. Davis implements a relative value strategy, seeking to invest in quality companies that are growing their earnings but are attractively priced. Over 800 stocks in the Russell 1000 Index are tracked by the Russell 1000 Value Index. Davis invests in great companies at attractive prices rather than deep-value managers who invest in fair companies at great prices.
While the Magnificent Seven stocks have been driving the market and growth indices, Kittsley notes that some of those stocks are held in Davis Funds due to their reasonable valuation levels and the expectation for earnings growth over the next decade.
The Davis Select US Equity ETF (DUSA) is the flagship ETF that invests in large-cap, durable, well-managed businesses. The ETF invests in approximately 28 quality companies with strong management teams and competitive moats at attractive valuations. The fund trades at approximately a 40% discount to the valuation multiples of the S&P 500 Index, but the portfolio is growing earnings slightly faster than the benchmark.
Active ETFs are gaining one-third of all ETF flows, with the AUM of active ETFs rising from 1% to 8% of all ETF assets in just the last few years. The market share of active ETFs is likely to continue to rise as active managers transition from mutual fund to ETF structures.
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