The threat of persistent inflation hangs over markets in the second quarter as investors weigh the path of interest rates. Quality investing can provide several benefits to portfolios and can hold strong appeal when markets remain frothy and uncertain.
Quality companies are generally defined as financially healthy companies with strong balance sheets and earnings. The level of quality is measured in a variety of different ways, but investors often look to quality companies for the stability they provide. Investing in these types of companies is generally referred to as quality investing.
Investors flock to benchmark funds for the cheap beta they provide. There is something to be said for broad equity exposure; however, including targeted, quality-focused equity strategies within an equity portfolio can offer benefits.
Equity dispersion historically rises during periods such as this and can currently be seen in the markets as it remains elevated across U.S. equities.
Elevated dispersion means that while strong performers offer significant returns, under-performers often drag on benchmark indexes with equal significance. Optimizing equity exposures for quality may be able to help filter out these underperforming exposures found in cheap beta funds.
VFLO: Make Your Equity Exposures Count With Quality
Quality companies offer the potential for reliable performance and income in an uncertain market environment. The VictoryShares Free Cash Flow ETF (VFLO) is potentially well positioned in the current macro environment, given its focus on company health and its growth tilt.
VFLO’s rules-based index methodology seeks to offer investors access to quality companies with high free cash flow (FCF) yield. 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. It is often used to measure a company’s health.
The ETF tracks the Victory U.S. Large Cap Free Cash Flow Index, which calculates FCF holistically, including both trailing and anticipated FCF based on analyst estimates. The Index methodology accounts for overall FCF and FCF yield when weighting companies in the portfolio.
The ETF carries a net expense ratio of 0.39% (gross expense ratio of 0.66%).
Net expense ratio reflects the contractual waiver and/or reimbursement of management fees through October 31, 2024.
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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. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
Beta is a term used in finance to denote the volatility or systematic risk of a security or portfolio compared to the market, usually the S&P 500 which has a beta of 1.0. Stocks with betas higher than 1.0 are interpreted as more volatile than the S&P 500.
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. 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. 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. 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.
