How Distillate Capital Is Reshaping Small/Mid-Cap Value Investing With DSMC

The traditional toolkit for identifying undervalued stocks is broken. After three decades of economic shifts—where corporate value has migrated from tangible assets to intangible innovation—the metrics that once worked for value investors no longer tell the full story. Distillate Capital is betting that a different lens can unlock opportunity in one of the market’s most overlooked segments.

The Case for Cash Flow-Based Valuation

Distillate Capital’s core insight is straightforward but powerful: accounting measures of valuation no longer reflect economic reality. When companies stopped building factories and started investing heavily in R&D, a fundamental accounting problem emerged. Capital expenditures show up on balance sheets as assets, but research spending doesn’t. This invisible shift has rendered traditional value metrics increasingly obsolete.

Co-Founder Jay Beidler explained the stakes: “Value isn’t dead; it’s just not being measured properly.” This philosophy has driven Distillate’s approach across its entire ETF lineup. By focusing on free cash flow as the primary lens for identifying value and quality, the firm has developed a systematic methodology that filters out the noise of traditional accounting measures.

Distillate’s Track Record: From DSTL to DSTX

The firm didn’t start with small/mid-cap exposure. Distillate launched the Distillate U.S. Fundamental Stability & Value ETF (DSTL) in late 2018, targeting large and mid-cap U.S. equities. The strategy worked. By August 2022, DSTL had accumulated close to $800 million in assets—a remarkable achievement for an independent ETF provider. The fund’s strong relative performance validated the free cash flow thesis in the large-cap space.

Building on that success, Distillate International Fundamental Stability & Value ETF (DSTX) launched in late 2020, extending the same cash flow-based methodology to global ex-U.S. markets. Now, with DSMC, Distillate is making its boldest move yet.

Why Small/Mid-Cap Markets Need Distillate’s Approach

The small/mid-cap universe has historically received less analytical scrutiny than large-cap stocks. This creates a peculiar problem: massive dispersion in valuations, hidden leverage on company balance sheets, and a staggering reality—nearly 20% of companies in the largest small-cap index are projected to generate negative free cash flow over the next twelve months.

Thomas Cole, CEO of Distillate Capital, sees this as an opportunity: “Small- and mid-cap areas have been rife with opportunity, but existing offerings haven’t taken a discerning eye to fundamental differentiation. We believe selectivity and systematic methodology are essential here.”

Introducing DSMC: The Small/Mid Cash Flow Solution

The Distillate Small/Mid Cash Flow ETF (DSMC), trading on NYSE Arca, targets approximately 150 U.S. small- and mid-cap stocks that meet specific criteria:

• Current and future free cash flow strength
• Attractive valuations relative to fundamentals
• Quality metrics that signal stability and resilience

With an expense ratio of 0.55%, DSMC applies the same disciplined, cash flow-focused framework that made DSTL successful, but tailored for the unique risks and opportunities of smaller companies.

The Systematic Edge

Distillate’s approach to small/mid-cap investing isn’t based on stock-picking intuition—it’s built on a systemized methodology that investors can track and verify. The fund eliminates stocks that are expensive, have volatile fundamentals, or carry significant debt burdens. By combining value identification with risk minimization, DSMC aims to exploit behavioral market inefficiencies while protecting downside.

The distinction matters: in a market segment where many investors apply broad-brush approaches, systematic selectivity can compound into meaningful outperformance.

What’s Next for Distillate Capital’s ETF Ecosystem

With three complementary ETFs now in market—covering U.S. large/mid-cap, international exposure, and domestic small/mid-cap segments—Distillate Capital has constructed a cohesive family of products built on a single, coherent philosophy. The expansion into small/mid-cap represents not a tactical pivot but a natural extension of a methodology that has already proven itself.

For investors and advisors seeking modern approaches to value investing, the message is clear: traditional accounting-based valuation frameworks are increasingly inadequate. Distillate Capital’s cash flow-centric strategy offers a systematic alternative for capturing undervalued opportunities across multiple market segments.

More information about Distillate Capital’s ETF lineup is available at www.distillatefunds.com. Investors should carefully review the prospectus or summary prospectus before investing, as ETF shares trade at market price and may trade at discounts or premiums to net asset value. Past performance does not guarantee future results.