Free cash flow (FCF) ETF investing is growing in popularity as investors look for innovative ways to get exposure to the market.
There are several FCF ETFs available to investors. The VictoryShares Free Cash Flow ETF (VFLO ) is unique in that it considers future FCF in addition to trailing FCF.
“If you’re only looking at trailing FCF, you risk paying for past performance,” Scott Kefer, senior portfolio manager for VictoryShares and Solutions, told VettaFi.
The economic environment can change, and if the investment approach isn’t able to look ahead, it could miss important inflection points in a company, he explained.
See more: VFLO Q2 Rebalance Highlights Free Cash Flow Yield
“Any cyclically sensitive company will go through these periods where costs change, the cycle changes, commodity prices change. What has been a great environment for them can change pretty materially,” Kefer explained. “Suddenly, their costs have gone up, or their revenue slows because of an economic cycle. Their free cash flow generation, therefore, is going to change as well.”
Pharmaceutical company Moderna (MRNA) serves as a good example. The COVID-19 vaccination was in high demand when it first became available. However, the revenue opportunity changed once the vaccine was no longer in demand.
“It’s really, really important to have that forward look as well. You don’t want to risk paying for past performance,” Kefer added.
By considering forward-looking metrics, an ETF like VFLO may not only exit these companies faster, it may also enter them sooner if looking ahead as well.
Forward-Looking Metrics Can Capture New Opportunities for FCF ETF
Biopharmaceutical name Amgen (AMGN) is an example of a name that was added to VFLO’s portfolio due to the forward-looking FCF perspective.
In the case of Amgen, there was a drug approval on the company’s horizon that factored into the forward-looking aspect of FCF. Looking at historic FCF figures wouldn’t have captured the forward estimates of the upcoming drug launch, according to Kefer.
“If you were only looking at trailing free cash flow, it’s been relatively flat,” Kefer noted. “But the forward-looking FCF is beginning to accelerate.”
That, in turn, improved the company’s overall FCF yield metrics. By including forward-looking FCF, Amgen has a higher FCF profile and made it into the ETF’s 50-stock portfolio.
To conclude, the forward-looking metric is not only useful in analyzing when VFLO should get out of a name. It can also be used to find attractive opportunities with the potential for accelerating FCF generation, as was the case with Amgen.
For more news, information, and analysis, visit the Free Cash Flow Channel
VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is not issued, sponsored, endorsed, or sold by VettaFi. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
As of 9/30/2024 the VictoryShares Free Cash Flow ETF (VFLO) did not hold any position in Moderna. As of the same date VFLO held a 3.07% position in Amgen (AMGN).
VFLO’s top 10 holdings and weights as of 9/30/2024 are listed above. Holdings are subject to change.
Disclosure Information
Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit http://www.vcm.com/prospectus. Read it carefully before investing. All investing involves risk, including the potential loss of principal.
All investing involves risk, including the potential loss of principal. Please note that the Fund is a new ETF with a limited history. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited, and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value. The ETF invests in securities included in, or representative of securities included in, the Index, regardless of their investment merits.
The performance of the Fund may diverge from that of the Index. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions The ETF could also be affected by company-specific factors that could jeopardize the generation of free cash flow. Investments concentrated in an industry or group of industries may face more risks and exhibit higher volatility than investments that are more broadly diversified over industries or sectors. Derivatives may not work as intended and may result in losses.
Additional Information
If a seed investor redeems its shares, it could negatively impact the Funds’ NAV, market price and brokerage costs. The ETF has the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited, and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value. The ETF invests in securities included in, or representative of securities included in, the Index, regardless of their investment merits.
Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Fund’s shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. The value of your investment is also subject to geopolitical risks such as wars, terrorism, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies.
The Victory U.S. Large Cap Free Cash Flow Index aims to select high quality companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly. This Index calculates free cash flow yield by dividing expected free cash flow by enterprise value. Expected free cash flow is the average of trailing 12-month FCF and next 12-month forward free cash flow. Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization.
Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.
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