Signs of economic weakening at the end of the second quarter raised investor concerns about economic performance for the remainder of 2024. Investors looking to hedge for potential slowing may consider the VictoryShares Free Cash Flow ETFs. The ETFs invest for quality and high free cash flow yield while adding a growth tilt.
Stocks historically underperform during recessions and periods of economic contraction. Reduced consumer spending and economic activity translate to less earnings growth and revenue for companies. However, some stocks and strategies perform better amidst drawdowns. Within factors, quality offered consistent outperformance during some of the largest equity drawdowns in the last 30 years.
A Morningstar analysis of MSCI Factor indexes found that within the U.S., of all factors, the quality factor performed best when equities plummeted. Quality, as defined by the MSCI USA Quality NR Index, focuses on companies with consistent earnings growth over time, high return on equity, and low financial leverage.
Quality companies have demonstrated stability and performance across the entirety of the economic cycle. Their dependability can make them an attractive investment in periods of economic stress.
Combine Quality, Free Cash Flow Yield, and Growth
Free cash flow (FCF) is the remaining cash a company has after covering all expenses. It can be used to invest in growing the business, pay dividends or pay down debt. FCF yield is the FCF a company generates relative to the company’s market value. It is determined by dividing the amount of money remaining after paying capital and operating expenses by the enterprise value.
VictoryShares provides an avenue to access quality companies with high FCF yields through two ETFs: the VictoryShares Free Cash Flow ETF (VFLO ) and the VictoryShares Small Cap Free Cash Flow ETF (SFLO ). These funds may be attractively positioned in the current macroeconomic environment, with concerns of a market pullback or potential recession looming. Their methodologies, which focus on company health with the added growth tilt, make them a notable diversifier to portfolios.
Index Tracking
VFLO seeks to track an index, the Victory U.S. Large Cap Free Cash Flow Index, which offers investors access to large-cap, quality companies with high FCF yields.
SFLO’s Index, the Victory U.S. Small Cap Free Cash Flow Index, seeks to provide exposure to small-cap companies with high FCF yield. Rather than pulling stocks from the Russell 2000 Index, the Index pulls from a larger initial universe of 2,500 companies via the VettaFi US Equity Mid/Small-cap 2500 Index. This helps expand the selection of stocks to those with more liquidity.
Both methodologies offer exposure to companies with favorable forward-looking FCF estimates and employ a growth screen, providing an innovative solution to FCF investing.
VFLO carries a net expense ratio of 0.39% (gross expense ratio of 0.66%). 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
Free cash flow (FCF) is a company’s net cash flow from operations minus capital expenditures.
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. 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 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 disruptions.
The Funds 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 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.
Additional Information
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 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. (VCS). VCS is not affiliated with VettaFi.
20240731-3710406
