Towle Value ETF (TCV)

The Towle Value ETF is the public-market incarnation of a long-standing value-investing discipline. It builds a portfolio by identifying large and mid-cap US companies that trade below what fundamental analysis suggests they are worth, and it holds them with the conviction that markets eventually recognize their true value.

The origins of Towle Value

Value investing as a practice began in the 1930s when Benjamin Graham and David Dodd wrote “Security Analysis,” arguing that stocks could be bought cheaply when markets panicked or lost confidence in a company’s future. The Towle approach inherits this tradition: it begins with the assumption that markets are often wrong — that a company’s stock price can fall below what its assets, cash flows, and earning power actually warrant — and that patient investors who identify these discrepancies can profit when the market corrects.

Towle’s application of this philosophy has evolved over the decades. It is not a formula-driven mechanical screen that buys every stock trading below book value or below a certain price-to-earnings ratio. Rather, it involves deep analysis of company financials, competitive position, management quality, and the specific reasons a stock is trading at a discount. A stock might trade cheaply because the market has temporarily lost confidence, or because it is genuinely in secular decline. Towle’s job is to distinguish the two.

The value discipline in modern markets

For much of the 20th century, value investing was the dominant approach, and it generated strong returns for practitioners like Graham, Dodd, Buffett, and others. Starting in the 1990s, growth investing — buying companies with strong revenue growth regardless of valuation — began to dominate, and value investing fell out of favour. Technology stocks with minimal earnings but enormous growth potential rose to become the largest holdings in the market. Value strategies lagged.

TCV, as a modern value-focused ETF, operates in this environment of skepticism toward value-investing philosophy. The fund’s thesis is that this skepticism itself creates the opportunity: if the market is ignoring the cash flows of a profitable, well-established company to chase narrative growth stocks, a disciplined value investor can buy those neglected companies at attractive prices. Over long time horizons, Towle believes, cash flows and earnings power are what matter, and markets eventually reward them.

How value stocks are identified

The Towle methodology starts with traditional value metrics: price-to-earnings ratios (is a stock cheap relative to its profits?), price-to-book ratios (is it cheap relative to its assets?), and free-cash-flow yields (does it generate cash at an attractive rate?). A company trading at a P/E of 8 times earnings while the market trades at 20 times might be a candidate, provided the low multiple is not due to the company being in permanent decline.

Beyond mechanical valuation screens, Towle’s process includes fundamental analysis. The fund’s investment team reads annual reports, studies management, and tries to understand the company’s competitive moat (or lack thereof) and the durability of its earnings power. A steel company trading cheaply might be cheap because the industry is contracting. A profitable insurance company trading cheaply might be cheap because the market fears a recession will spike claims. Towle’s job is to assess whether the market’s pessimism is warranted.

Patience and holding conviction

The Towle approach requires patience. A stock can be cheap and get cheaper before it recovers. A fund manager following Towle’s discipline must hold positions even when prices fall further, provided the fundamental value thesis has not changed. This requires conviction and tolerance for underperformance during periods (like the past decade) when growth stocks dominate and value lags.

This patience also means low portfolio turnover. Towle does not chase momentum or trade frequently. Once a position is bought, it is held until one of two things happens: the stock price rises to reflect its intrinsic value, or the company’s fundamental situation changes in a way that undermines the original thesis. Because of this, the fund’s holdings tend to be stable from quarter to quarter, and portfolio turnover is low relative to actively managed funds.

The portfolio and sector biases

TCV’s holdings typically skew toward sectors that are mature, profitable, and currently out of favour: financials, energy, industrials, utilities, and consumer staples. These are the sectors where Towle can often find companies with durable competitive advantages (or at least stable cash flows) trading at low valuations. Technology tends to be underrepresented, not because Towle dislikes technology, but because technology stocks (especially dominant ones) rarely trade at a discount to intrinsic value.

This sector bias creates a natural characteristic: when growth stocks are leading the market, TCV tends to lag. When value stocks rotate into favour (as happens in economic downturns or rising-rate environments), TCV tends to outperform. Over complete market cycles, Towle’s thesis is that patience and fundamental discipline pay off, but the path is rarely smooth.

Capital allocation and returns

Towle Value’s approach to capital allocation reflects its philosophy. Once it owns a stock, the fund receives dividends (value stocks tend to pay higher dividend yields than growth stocks) and benefits from any earnings growth the company generates. If the company reinvests its cash flow productively, earnings grow, the stock’s intrinsic value grows, and eventually the market’s valuation catches up. If the company is mature and pays out most of its cash as dividends, the fund receives a steady income stream while waiting for multiple expansion.

The fund’s returns thus depend on two sources: dividend income (higher for value stocks) and capital appreciation (the re-rating that occurs when the market recognizes the company’s true value). In years when dividend yields are high and the market is generous, both sources can contribute positively. In years when valuation multiples compress (as happens in recessions), both can work against the fund.

Risks and limitations

The central risk of the Towle Value approach is the possibility that the market is right and the investment team is wrong. A company trading cheaply might be cheap because it is genuinely in structural decline, not because the market has temporarily mispriced it. Over a long career, value investing sometimes confronts “value traps” — companies that trade cheaply for good reason and never recover.

A second risk is the opportunity cost of patient, concentrated positioning. While Towle is waiting for the market to recognize value in overlooked stocks, faster-growing companies can deliver far better returns. An investor holding TCV through a period of technology outperformance (as the 2010s and early 2020s saw) will significantly underperform the broader market. The patience required can cost money in the short and medium term.

Finally, there is no guarantee that value investing’s historical returns will persist. If technology and growth remain dominant indefinitely, and capital increasingly flows to high-growth companies at any valuation, the discounts to intrinsic value that historically rewarded value investors may never close.

Expenses and research

TCV is an ETF with relatively low expense ratios, typically 0.30% to 0.45%, because it combines the passive ease of an ETF with a disciplined (but not hyper-active) valuation-driven approach. The fund trades on an exchange throughout the day.

To research TCV, start with the fund’s fact sheet and prospectus, which detail the investment process and current holdings. Review the fund’s sector breakdown and compare it to the broader market — value funds are typically concentrated in different sectors than growth funds. Examine the fund’s valuation metrics relative to the overall market to verify the team is actually buying cheap stocks. Look at TCV’s performance through different market environments: strong periods for growth stocks, weak periods, recessions, and inflationary periods. Understand that value investing is a long-term discipline, and short-term underperformance should not be surprising. Finally, compare TCV’s returns and fees to other value-focused ETFs to determine whether the Towle approach is delivering its promised patience and discipline.