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 VictoryShares Free Cash Flow ETF (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.
See more: Why Companies With Strong Free Cash Flow Are Often Self-Sufficient
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.
Disclosures
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.
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 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.
Additional Information
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.
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.
Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.
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