Capacity constraints can be a significant problem for small-cap ETFs, particularly those screening for free cash flow (FCF), which further reduces the number of eligible securities.
Small-cap ETFs can become capacity-constrained when they get too large. ETFs offer many benefits for investors, including enhanced transparency and efficiency. However, due to capacity constraints, ETFs cannot soft-close, underscoring the importance of investing in small-cap strategies that consider and attempt to solve for capacity constraints.
A solution may be the VictoryShares Small Cap Free Cash Flow ETF (SFLO ), which was constructed to maximize liquidity and have high capacity. The ETF’s index methodology and larger starting universe aim to solve for capacity and liquidity issues.
How VictoryShares’ Small-Cap FCF ETF Solves for Capacity Constraints
SFLO tracks the Victory U.S Small Cap Free Cash Flow Index, (the Index) which employs the same underlying strategy and process as the popular VictoryShares Free Cash Flow ETF (VFLO ). However, the Index also incorporates robust liquidity requirements to maximize trading efficiency.
The Index pulls from the VettaFi US Equity Mid/Small-Cap 2500 Index as its starting universe. This universe includes both small- and mid-cap companies, expanding the universe of eligible securities.
While VFLO’s underlying index pulls securities from a universe comprising 400 securities, SFLO’s underlying Index pulls securities from a universe comprising 2,500 securities.
The Index selects the 300 companies in the VettaFi US Equity Mid/Small-Cap 2500 Index with the highest FCF yields. The Index then selects the 200 companies with the highest growth scores and weights those final holdings based on both FCF yield and size.
See more: How SFLO Has Changed to Capture the Current Opportunity Set
SFLO’s wider opportunity set is a differentiator compared to other FCF ETFs. Additionally, the fund incorporates a strict liquidity screen, reducing the least liquid names. These two differentiators aim to address capacity constraints.
SFLO carries a net expense ratio of 0.49% (gross expense ratio of 0.76%).
Net expense ratios reflect the contractual waiver and or reimbursement of management fees through at least December 31, 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.
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.
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 concentrated in an industry or group of industries may face more risks and exhibit higher volatility than investments that are more broadly diversified over industries or sectors. 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. Investments in smaller companies typically exhibit higher volatility.
Additional Information
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. The securities highlighted, if any, were not intended as individual 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.
VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.
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