Consider These Two ETFs When Seeking Equity Diversification

Investors will contend with the looming U.S. presidential election, ongoing geopolitical risks, and economic uncertainties in the fourth quarter. All of which create possible sources of volatility and risk. Investors looking to manage or mitigate their portfolio’s risk may seek to increase their diversification. By investing across a variety of asset classes and sectors, they may potentially reduce the impacts of individual assets, sectors, or even asset classes underperforming.

FCF strategies may offer the potential for diversified portfolios and sector weightings compared to their broad benchmarks. FCF is the cash remaining to a company after it’s paid its expenses. Companies use this money to invest in paying dividends, paying down debt, or growing their business. It’s also considered one component of measuring a company’s health or value.

VictoryShares takes FCF investing a step further. When screening companies, the methodologies of VictoryShares’ two FCF ETFs calculates FCF holistically by including both trailing and expected FCF. The indexes also apply a growth filter to screen out companies with high FCF but weak growth prospects.

This exposes investors to quality companies (value) while applying a growth screen. It also creates potential portfolio diversification opportunities when added alongside existing equity exposures.

The VictoryShares Free Cash Flow ETF (VFLO ) holds quality companies with high FCF yield and tracks the Victory U.S. Large Cap Free Cash Flow Index. FCF yield considers a company’s enterprise value or total value, including debt. It’s calculated by dividing the cash left over after paying capital and operating expenses by the enterprise value.

VFLO offers notable diversification from major large-cap equity benchmarks. The top three sectors by weight within the ETF were health care (24.97%), energy (22.99%), and consumer discretionary (18.90%) as of 9/30/24. Meanwhile, the Russell 1000 Value Index’s largest sectors included financials (21.17%), health care (15.54%), and industrials (14.72%) over the same period, according to FTSE Russell.

VFLO carries a net expense ratio of 0.39% and a gross expense ratio of 0.66%.

VFLO’s net expense ratio reflects the contractual waiver and/or reimbursement of management fees through October 31, 2024.

The VictoryShares Small Cap Free Cash Flow ETF (SFLO ) seeks to track the Victory U.S. Small Cap Free Cash Flow Index (the SFLO Index). The SFLO Index methodology minimizes liquidity constraints by beginning with a larger universe of 2,500 companies through the VettaFi US Equity Mid/Small-Cap 2500 Index. It also eliminates the bottom 10% of securities based on liquidity. In addition to reducing constraints, the SFLO Index focuses on quality companies trading at a discount and demonstrating high FCF yield.

The approach results in diversified sector exposure compared to the Russell 2000 Value Index. SFLO’s top three sector weights were energy (28.23%), consumer discretionary (19.45%), and industrials (17.99%) as of 9/30/24. In comparison, the Russell 2000 Value Index’s top three sectors included were financials (28.09%), industrials (12.20%), and real estate (11.38%) over the same period, according to FTSE Russell.

SFLO carries a net expense ratio of 0.49% (gross expense ratio of 0.76%).

SFLO’s net expense ratio reflects the contractual waiver and/or reimbursement of management fees through December 31, 2024.

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

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.

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. 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.

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.

20241029-3979759