Since the Great Financial Crisis that spanned 2007-2009, value indexes have struggled to outperform their growth counterparts. This may be partly due to many major value indexes failing to include free cash flow (FCF) in their construction. By using FCF, investors may discover overlooked performance opportunities within the value spectrum.
Investors commonly measure a value stock by using price-to-earnings (P/E), price-to-book (P/B), or price-to-sales (P/S) ratios. P/E ratio measures a company’s stock price to its earnings per share. P/B ratio compares a company’s market value to its book value. P/S ratio divides a company’s market capitalization by its most recent annual revenue.
Neglecting to include FCF may miss a vital part of the value equation. FCF is the remaining cash a company has after covering all expenses. Companies use this money to grow the business, pay dividends or pay down debt. It’s also considered one component of measuring a company’s health. However, it isn’t just current FCF that investors should consider when seeking opportunities in value stocks. That would be like only looking in the rear-view mirror while driving. Looking forward is equally, if not more, important. The same is true for FCF investing.
“An important takeaway is the value of a company is the present value of its future free cash flow — with emphasis on future,” explained Michael Mack, client portfolio manager for Victory Capital, in a webcast hosted on the VettaFi platform during the first quarter of 2025.
The Overlooked Value of FCF
Mack brings more than a decade of experience in FCF investing to the table and noted that while hedge funds may use FCF as a fundamental measurement when value investing, indexes on the ETF side do not always include FCF in their calculations. In fact, many of the major value indexes do not include FCF in their construction at all.
Relying only on measurements such as P/B fails to capture the full value of a company. In a tech-dominant industry, many companies often have their value tied up in intangibles. This includes their intellectual property, research and development, patents, and more.
“From a marketplace standpoint, there is an opportunity to bridge that gap by taking the concept of free cash flow, applying it systematically and unemotionally inside a tax-efficient ETF wrapper to address this anomaly where there wasn’t a free cash flow offering,” Mack said.
VictoryShares & Solutions considers both FCF and FCF yield when investing in quality companies. FCF yield captures a company’s enterprise value or total value, including debt. It calculates the cash left over after paying capital and operating expenses by the enterprise value. In fact, FCF yield has been a valuation metric that has outperformed historically and with less risk compared to other traditional valuation metrics.
3 Ways to Invest in FCF with VictoryShares
The VictoryShares Free Cash Flow ETF (VFLO ) invests in quality companies with high FCF yield and tracks the Victory U.S. Large Cap Free Cash Flow Index. Meanwhile, the +VictoryShares Small Cap Free Cash Flow ETF+ (SFLO ) seeks to track the Victory U.S. Small Cap Free Cash Flow Index. The indexes that these two ETFs track, both provide exposure to companies with high FCF yield.
When screening companies, the VFLO and SFLO indexes’ methodologies calculate 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 step can potentially enhance returns and provide more consistent performance through both value and growth markets.
The more recently launched VictoryShares Free Cash Flow Growth ETF (GFLW) provides exposure to companies with the potential to compound FCF generation through the combination of profitability and growth. The ETF seeks to track the Victory Free Cash Flow Growth Index which selects securities based on high FCF relative to return on invested capital. This calculation may provide a more comprehensive picture of a company’s financial health compared to using FCF relative to sales. It may capture the efficiency in which a company is using its capital to generate cash flow.
VFLO carries a net expense ratio of 0.39% (gross expense ratio of 0.48%). SFLO carries a net expense ratio of 0.49% (gross expense ratio of 0.87%). GFLW carries an expense ratio of 0.39% (gross expense ratio of 0.58%).
VFLO and SFLO net expense ratios reflect the contractual waiver and/or reimbursement of management fees through October 31, 2025.
GFLW net expense ratios reflect the contractual waiver and/or reimbursement of management fees through October 31, 2026.
For more news, information, and analysis, visit the Free Cash Flow Channel
VettaFi LLC (“VettaFi”) is the index provider for VFLO, SFLO, and GFLW for which it receives an index licensing fee. However, VFLO, SFLO, and GFLW 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, SFLO and GFLW.
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. 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 disruption. The Funds could also be affected by company-specific factors that could jeopardize the generation of free cash flow. 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.
Transactions in shares of ETFs may result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. Certain traditional mutual funds can also be tax efficient.
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.
The Victory Free Cash Flow Growth Index measures the performance of profitable companies that generate high free cash flow from invested capital and display higher growth characteristics. The indices are subject to sector and security weight constraints. The constituents are weighted by modified absolute momentum.
VictoryShares ETFs distributed by Victory Capital Services, Inc.
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