How SFLO Has Changed to Capture the Current Opportunity Set

SFLO offers exposure to high-quality small-cap companies trading at a discount with favorable growth prospects and high expected free cash flow (FCF) yields. This focus on companies with attractive FCF yields and high expected growth rates sets it apart from its benchmark, the Russell 2000 Value Index, and category peers.

FCF represents the cash a company generates after accounting for cash payments to support operations and maintain its capital assets. It allows companies to reinvest cash, pay dividends, or pay off debt. FCF is a valuable metric for evaluating companies and investment opportunities.

SFLO’s approach focuses exposure on the U.S. small-cap universe by incorporating robust liquidity requirements to maximize trading efficiency.

SFLO tracks the Victory U.S. Small Cap Free Cash Flow Index (the Index). The ETF overweights the consumer discretionary, energy, consumer services, industrials, and information technology sectors compared to the benchmark. Additionally, the ETF has no exposure to real estate, utilities, or financials.

The lack of exposure to the financials sector is particularly interesting, as the sector has the largest weight in the Russell 2000 Value Index as of the end of June. SFLO’s underweight to this sector is important because FCF may not be an applicable metric for financial companies due to accounting practices.

The top 10 holdings in SFLO saw some notable changes during the second quarter, as shown in the table below.

The key changes include the rise of Chord Energy, Vista Outdoor, Dropbox, Jazz Pharmaceuticals, Civitas Resources, and California Resources Corp. It’s important to note that all were ETF holdings previously, although not in the top 10.

Chord Energy, Civitas Resources, and California Resources Corp all operate in the energy sector.

Chord Energy is engaged in hydrocarbon exploration and hydraulic fracturing. Meanwhile, Civitas is a carbon-neutral oil and natural gas producer, and California Resources Corp works in hydrocarbon exploration.

Vista Outdoor, a designer and manufacturer of outdoor sports and recreation products, is a consumer discretionary stock.

Dropbox, the file hosting service, bolsters the fund’s technology exposure.

Finally, Jazz Pharmaceuticals, a healthcare stock, is a biopharmaceutical company focused on oncology and neuroscience.

Investors really seem to be gravitating to the exposures and approach that SFLO can deliver as it has garnered over $100 million in assets1 since its launch in December 2023.

1/ As of 8/19/2024

For more news, information, and analysis, visit the Free Cash Flow Channel

VettaFi LLC (“VettaFi”) is the index provider for SFLO, for which it receives an index licensing fee. However, SFLO is 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 SFLO.

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 Fund 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. Investments in smaller companies typically exhibit higher volatility. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions.

The fund could also be affected by company-specific factors that could jeopardize the generation of free cash flow. Derivatives may not work as intended and may result in losses. 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. Investments in mid-cap companies typically exhibit higher volatility. 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.

Additional Information

Investments in small-capitalization companies involve greater risks than those associated with larger, more established companies. Free Cash Flow Risk—Investing in companies with high free cash flows could lead to underperformance during periods when such investments are unpopular, and fluctuations in market conditions, industry disruptions, or company-specific factors may jeopardize the generation of free cash flow. Fund holdings and sector allocations are subject to change, may differ from the Index, and should not be considered investment advice.

The Victory U.S. Small 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., the Fund’s investment adviser.

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