The energy sector has focused on improving free cash flow (FCF) fundamentals in recent years, creating an attractive opportunity for FCF ETFs.
Historically, energy companies had leaned on prioritizing growth at the expense of FCF. However, a recent shift of focus on productivity and discovering efficiencies means energy companies are now generating substantial FCF relative to other sectors.
FCF can be used as a metric to assess a company’s financial health and quality. FCF is the cash left over after a company has covered its expenses. It is used in various ways, such as paying down debt, issuing dividends, and investing in growing the business.
The improved FCF fundamentals in the energy sector are why FCF-focused approaches may find the space attractive. The VictoryShares Free Cash Flow ETF (VFLO ) seeks to provide exposure to companies with high FCF yields. The ETF is currently overweight the energy sector compared to the benchmark Russell 1000 Value Index.
The energy sector makes up 23.6% of VFLO by weight as of March 31, 2025. That’s compared to just 7.1% in the Russell 1000 Value Index.
Devon Energy (DVN) is an energy holding in VFLO as of March 31st carrying a weight of 3.0%. The company serves as an example of an energy company generating strong FCF. In February 2025, the company reported its fourth quarter of 2024 results and said it would produce more oil and spend less on capital expenditures in 2025, resulting in more FCF.
“Devon Energy is a good example of an efficiently operated energy company that has been growing its dividend. Based on their reporting I would estimate that they are going to buy back stock and pay down debt.” Michael Mack, client portfolio manager for Victory Capital, told VettaFi.
How Lower Oil Prices Could Affect Energy Names in FCF ETFs
Many investors may be wondering what will happen to the FCF generated by energy companies if oil prices are to come down.
Lower prices are not necessarily a bad thing for the energy space. While lower prices could mean less revenue, Mack said, this is less of a concern if the energy companies can continue to operate as efficiently as they once did before price declines in order to not interrupt their FCF.
The importance of considering a FCF-focused approach such as VFLO’s is that the indexed approach considers expected FCF as well as trailing FCF. This positions VFLO to remain dynamic and forward-looking.
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, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
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The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations in this report are subject to change without notice and are not intended as individual investment advice. The securities highlighted, if any, were not intended as individual investment advice.
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. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions.
Additional Information
The Fund 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 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.
VictoryShares ETFs distributed by Victory Capital Services, Inc.
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