High-flying IPOs, momentum, high-beta, and growth are making it appear as though value is no longer in style. However, as famed value investor Seth Klarman said in a recent Bloomberg interview, value opportunities are always lurking in the background even in today’s market.
“Today we have a backdrop of very expensive markets and a bit of euphoric conditions,” Klarman noted, saying that value investors can find market opportunities looking at the bottom-up.
One of those way to incorporate bottom-up analysis is through free cash flow (FCF). VictoryShares and Solutions, a purveyor of this metric with an FCF-focused ETF suite, announced some recent additions and deletions to these funds in the most recent rebalance. Three funds, in particular, saw notable changes: VictoryShares Free Cash Flow ETF { % etf VFLO %}, VictoryShares Free Cash Flow Growth ETF (GFLW ), and VictoryShares International Free Cash Flow ETF (IFLO ).
Key Takeaways:
- VFLO rotated heavily into the energy sector, adding giants like Devon Energy, Exxon Mobil, and ConocoPhillips while dropping positions in Dell Technologies and General Motors.
- GFLW updated its growth profile by pivoting toward heavy industrials and pharmaceuticals with new additions like Caterpillar and Dell, while completely exiting its consumer retail holdings.
- IFLO shifted its global focus toward Canadian energy firms like Suncor and Imperial Oil alongside tech firm SAP, while divesting from previous core holdings like Shell and Recruit Holdings.
VFLO Sports New Value Look
With over $7 billion in assets under management (AUM), VFLO can be viewed as the flagship fund of this cash flow suite. At the heart of VFLO’s strategy is the Victory U.S. Large Cap Free Cash Flow Index (the Index). It utilizes a rules-based screener that looks for companies with strong expected free cash flow (a forward-looking measure of a company’s future cash flows) as opposed to relying on past market data from trailing cash flow figures. The result is a more targeted focus on whether a company has the potential to continue growing its cash flow operations.
The latest rebalancing activity for VFLO revealed a significant rotation in the portfolio’s strategic focus. The fund received an influx of energy giants like Devon Energy Corporation (3.71%), Exxon Mobil Corp. (2.92%), and ConocoPhillips (2.31%), alongside T-Mobile US Inc (2.47%) and Intuit Inc (3.00%). Conversely, VFLO exited its position in Dell Technologies, but the company found its way into GFLW. This substantial exit, coupled with the removal of Delta Air Lines Inc., Humana Inc., ON Semiconductor Corp., and General Motors Company, indicates a shift away from these specific growth and industrial exposures.
See More: ETF of the Week: Victoryshares Free Cash Flow ETF (VFLO)
GFLW Updates Its Growth Profile
Despite high interest rates and geopolitical tensions affecting markets on the macroeconomic side, it didn’t keep investors from migrating away from growth. FCF can also work as a growth screener as evidenced by GFLW. The fund tracks the Victory Free Cash Flow Growth Index (the “Index”), which employs a discerning screening methodology that selects constituents based on their FCF relative to return on invested capital.
The latest adjustments for GFLW reveal an update to the fund’s growth-oriented portfolio. The latest additions demonstrate a renewed interest in industrial and tech-heavy names. Caterpillar Inc entered the portfolio at a 3.41% target weight, followed by Dell Technologies Inc (2.70%) and Royalty Pharma PLC (1.97%). Exiting the fund were Ross Stores Inc (1.92%), The TJX Companies Inc. (1.62%), and Ralph Lauren Corp. (1.12%). This suggests a tactical migration toward heavy industrial and pharmaceutical growth, while exiting the consumer retail segment that previously occupied a portion of the fund’s weightings.
See More: Why SanDisk (SNDK) Is GFLW’s Top Holding
IFLO Emphasizes International Market Value
FCF isn’t relegated to domestic borders as it can also identify value in international equities. IFLO is a prime example of this adaptability. The fund tracks Victory International Free Cash Flow Index (“IFLO Index”), which screens for companies that yield the highest FCF, using both trailing and forward-looking FCF metrics.
IFLO’s latest rebalance shows an emphasis on the energy and technology sectors. Additions to the fund included Suncor Energy Inc. (2.209%), Canadian Natural Resources Limited (1.876%), and Imperial Oil Ltd. (1.556%), alongside the software giant SAP SE (1.693%). These new positions replace several significant international holdings, including Shell PLC (3.03%), Recruit Holdings Co Ltd. (2.13%), Renesas Electronics Corp. (1.93%), and Flex Ltd. (1.84%). This transition reflects a move toward strengthening the portfolio’s energy-sector backbone while divesting from global technology, electronics, and staffing-related interests.
By leveraging a disciplined, bottom-up approach using FCF, these recent rebalances demonstrate that FCF remains a potent tool for navigating volatile markets. The funds’ rebalances underscore the enduring relevance of FCF when it comes to uncovering either value or growth, regardless of current market euphoria.
See More: Using Free Cash Flow Across International Value and Growth Equity Investing
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VettaFi LLC (“VettaFi”) is the index provider for VFLO, GFLW, and IFLO for which it receives an index licensing fee. However, VFLO, GFLW, and IFLO are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO, GFLW, and IFLO.
