Rising recession concerns, geopolitical risks, and the rapid unwinding of the yen trade are among the many risk factors that investors contended with over the summer months. Investors with an eye for ongoing macro risk and the potential effect on equity valuations should consider the VictoryShares Free Cash Flow ETF (VFLO ) for its lower price-to-earnings (P/E) exposure compared to broad benchmarks.
One of the main points of discourse this year continues to revolve around concerns of elevated equity valuations, specifically among large-cap companies. The artificial intelligence hype within markets sent stock prices soaring for several AI-related companies in the first half of 2024.
A common measurement of valuation is to use a company’s P/E ratio. This measures the share price of a company against its earnings per share.
If earnings growth continues to match stock price growth, a company’s elevated P/E ratio may be considered favorable. However, if a company’s earnings growth falter, it could lead to a price correction that collapses the P/E ratio. With broad equity index valuations buoyed higher this year by the outperformance of a handful of tech companies, investor concern about concentration risk rose. In order to sustain elevated broad equity benchmark valuations, these companies must continue to deliver strong earnings. Any challenges to their continued growth creates added risk for investors to contend with.
The S&P 500 Index had a 12-month trailing P/E of 27.45 as of 7/31/20241. The Russell 1000 Index had a P/E ratio (minus negative earnings) of 25.592. Meanwhile, the Russell 1000 Value Index had a lower P/E (minus negative earnings) of 18.99 as of 7/31/20242.
Lower Your P/E Exposure Before the Market Does it For You
The VictoryShares Free Cash Flow ETF (VFLO ) offers exposure to quality companies with favorable growth prospects. VFLO tracks the Victory U.S. Large Cap Free Cash Flow Index (the Index), which factors in both trailing and anticipated free cash flow (FCF).
The ETF’s focus on quality stocks generated a trailing P/E ratio of 15.48 as of 7/31/2024. By investing in an ETF such as VFLO, investors may be able to sidestep elevated P/E concerns and risks while still focusing on growth prospects.
FCF is an important metric when assessing the quality of a business as it represents 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 takes this one step further and considers a company’s enterprise or total value, including debt. FCF yield is calculated by dividing the cash left over after paying capital and operating expenses by the enterprise value.
When screening companies, the Index uses a rules-based methodology to account for overall FCF and FCF yield. The Index also employs a growth screen for securities included, giving VFLO a forward-looking, growth-oriented approach to FCF investing.
VFLO carries a net expense ratio of 0.39% and a gross expense ratio of 0.66%.
Net expense ratios reflect the contractual waiver and or reimbursement of management fees through at least December 31, 2024.
1/ S&P Dow Jones Indices
2/ FTSE Russell
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. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
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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