Free cash flow (FCF) represents the cash a company generates after accounting for cash payments to support operations and maintain its capital assets. It allows companies to reinvest cash, pay dividends, or pay off debt.
The (VFLO ) invests in profitable U.S. large-cap companies with high FCF yields. The ETF seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index¹. The Index methodology assesses FCF based on a historic and forward-looking basis.
Targeting High FCF Yield While Screening Out the Slowest Growers
On a webcast hosted by VettaFi, VictoryShares and Solutions Associate Portfolio Manager Michael Mack outlined the methodology. Mack explained that the Index initially selects the 400 largest profitable companies based on their market cap. An FCF screen is applied to identify and select the highest 75 FCF yielders.
Next, a growth filter is applied to eliminate companies where FCF is high because of weak growth prospects. This leaves the Index with the top 50 stocks with the highest expected growth score². The final portfolio is weighted by the size and yield of each company’s FCF.
“So, we say this is a way to identify value without sacrificing relative growth potential,” Mack stated.
Holdings are capped at 4%, and sector exposure is capped at 45%. According to VictoryShares, no sector can be 20% greater than the starting universe of the VettaFi 1000 Index.
“It really comes down to assessing free cash flow from a forward-looking basis and then factoring in a company’s growth rate,” Mack added.
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.
1 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.
2 The growth score measured by sales trend, EBIDTA growth and long-term earnings growth.
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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. The securities highlighted, if any, were not intended as individual investment advice.
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