This year’s summer months proved anything but sleepy in markets as a rotation from growth to cyclical stocks gained speed in July. The trend may prove a boon for ETFs like the VictoryShares Free Cash Flow ETF (VFLO ), which hit two milestones during the summer.
VFLO provides exposure to quality companies currently trading at a discount and continues to draw investor interest. This summer, the ETF hit its one-year anniversary in late June, and crossed the $500 million AUM threshold in July.
The ETF tracks the Victory U.S. Large Cap Free Cash Flow Index (the Index); its benchmark is the Russell 1000 Value Index. The Index provides a holistic way of assessing free cash flow (FCF), including trailing and anticipated FCF based on analyst estimates. Additionally, when weighing companies, the rules-based index accounts for overall FCF and FCF yield¹.
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 and is often used to measure a company’s health.
VFLO Combines Value Investing with a Growth Tilt
VFLO holds companies with high FCF metrics, which can be a sign of quality and operating efficiency. The Index methodology also provides exposure to companies with favorable, forward-looking FCF estimates with the highest growth rates. This allows investors to capture value while still harnessing growth potential.
See also: Dispelling the Free Cash Flow CapEx Myth With VFLO
The strategy employs a growth screen for securities, eliminating companies with high FCF but weak growth prospects. It creates a portfolio with earnings per share (EPS) growth that outpaced the Russell 1000 Value Index in recent years. EPS measures the profitability of a company. It is calculated by dividing a company’s net income by the outstanding shares of its common stock.
VFLOs holdings’ EPS growth was 20.43% compared to the Russell 2000 Value Index’s 13.75% as of 7/31/24 measured over the prior three years. Over the last five years, it outpaced the benchmark by nearly double at 18.47% EPS growth compared to the Russell 1000 Value’s 11.04% as of 7/31/24.
FCF investors have several options when looking to FCF ETFs. VFLO’s focus on quality and value investing with a growth tilt is one that continues to appeal to investors after launching in late June of 2023. The ability to capture both trailing and forward-looking FCF in its methodology may make it a notable addition to portfolios and worth consideration.
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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.
¹ FCF yield is based on the weighted average of index constituents and is equal to the expected FCF divided by enterprise value. Expected FCF is the average of the trailing 12-month FCF and the next 12-month forward FCF. Enterprise value measures a company’s total value and is often used as a more comprehensive alternative to equity market capitalization.
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 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.
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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