The new year began with a bumpy start for equities and large-cap technology companies. While small-cap stocks experienced drawdowns alongside the broader market in the January AI route, they performed better than their large-cap peers. Those investors looking to diversify their equity portfolios should consider the VictoryShares Small Cap Free Cash Flow ETF (SFLO ). The ETF’s fourth quarter index rebalance resulted in a greater focus on value and forward-looking free cash flow (FCF) yield, as the strategy remains dynamic in fluctuating markets.
SFLO tracks the Victory U.S. Small Cap Free Cash Flow Index (the Index), focusing on quality companies trading at a discount. The companies in the Index have historically generated high FCF yield. FCF is the cash remaining a company has after it has paid its expenses. Companies use this money to invest in paying dividends, paying down debt, or growing their business. FCF is also considered one component of measuring a company’s health. FCF yield is a financial ratio that standardizes the FCF per share a company is expected to earn compared to its market value per share.
The Index screens for both current FCF and anticipated FCF, providing a more holistic approach to FCF investing. A growth screen is then employed to help remove the slowest-growing companies. It collectively leads to a dynamic FCF strategy that remains forward-looking. After December’s Index rebalance, it began the year with a higher forward-looking FCF yield of 11.33% compared to the previous 9.71%, according to VictoryShares analysis sourced from FactSet.
Additionally, an important consideration within the methodology minimizes liquidity constraints by beginning with a large 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.
Bringing Value Into Focus
The Index rebalance in December 2024 meant that SFLO also started the new year with a greater focus on value sectors such as healthcare and financials, while reducing its exposure to information technology. Post-rebalance, the largest sector exposures in the Index included energy at 26.96% weight, consumer discretionary at 19.33%, and industrials at 17.06%, according to analysis from VictoryShares sourced through FactSet. Notably, the Index increased its energy sector exposure by 1.48%, healthcare by 2.13%, and financials by 1.67%. Meanwhile, the Index reduced information technology sector exposure by 2.01%.
SFLO carries a net expense ratio of 0.49% (gross expense ratio of 0.87%).
Net expense ratios reflect the contractual waiver and/or reimbursement of management fees through October 31, 2025.
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 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. 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. 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.
Effective on or about February 28, 2025, Foreside Fund Services, LLC (“Foreside”) will no longer serve as the distributor to the VictoryShares ETFs. Victory Capital Services, Inc.(VCS) , an affiliate of the Fund’s adviser, will replace Foreside in this capacity. VCS and its affiliates are not affiliated with Foreside.
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