Advisors and investors looking for quality companies often use free cash flow (FCF) as a measure of financial health. However, most strategies only capture half the picture, creating a short-to-intermediate term snapshot. For investors looking for longer-term potential, FCF yield can be analyzed in a more holistic approach to capture forward-looking opportunities.
FCF is the remaining cash a company has after covering all expenses. It can be used to invest in growing the business, paying dividends, or paying down debt. Investors generally use it as an indicator of a company’s financial health and ability to meet its financial obligations.
Combining Two Measures of FCF
Many strategies available today use trailing 12-month FCF measurements. While this provides a good snapshot of a company’s recent financial health, it’s only half the picture.
VictoryShares’ FCF-focused funds track indexes that include both trailing FCF as well as forward 12-month FCF estimates to calculate a company’s expected FCF. Forward-looking FCF estimates allow for a longer-term outlook and can help provide a more comprehensive FCF picture.
From there, the expected FCF gets divided by a company’s enterprise value to calculate FCF yield. Enterprise value measures a company’s market cap net its debt. This type of approach seeks out quality companies in stable financial health by including a company’s debt.
Harness FCF Yield With VFLO and SLFO
VictoryShares offers two ETFs that provide investors access to quality companies with high FCF yields — the VictoryShares Free Cash Flow ETF (VFLO ) and the +VictoryShares Small Cap Free Cash Flow ETF+ (SFLO ).
Their underlying indexes use a rules-based methodology to account for overall FCF and FCF yield. VFLO tracks the Victory U.S. Large Cap Free Cash Flow Index, while SFLO tracks the Victory U.S. Small Cap Free Cash Flow Index.
The index methodologies calculate both trailing and expected FCF and, as a result, can provide exposure to companies with favorable forward-looking FCF estimates.
A growth filter then gets applied to companies with the highest FCF yield, filtering for earnings and sales trends. Companies that make it into the underlying indexes exhibit high holistic FCF with favorable growth prospects.
VFLO has a net expense ratio of 0.39% (gross expense ratio of 0.66%). SFLO carries a net expense ratio of 0.49% (gross expense ratio of 0.76%).
The net expense ratio reflects the contractual waiver and/or reimbursement of management fees through December 31, 2024.
VettaFi LLC (“VettaFi”) is the index provider for VFLO and SFLO, for which it receives an index licensing fee. However, VFLO and SFLO 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 and SFLO.
For more news, information, and analysis, visit the Free Cash Flow Channel
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. Please note that the Funds are new ETFs with a limited history. The Funds have 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 Funds invest in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Funds may diverge from that of their Indexes. 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 Funds 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 Funds’ 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.
Additional Information
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.
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.
VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.
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