Free cash flow (FCF) is the cash a company has after paying its capital expenditures. Its use is to buy back stocks, pay dividends, or participate in mergers and acquisitions. FCF is also arguably a better metric to measure a company’s long-term healthcare and profitability when compared to traditional approaches to assessing value.
The VictoryShares Free Cash Flow ETF (VFLO ) tracks an index that seeks to capture profitable U.S. large-cap companies with high FCF yields. While value indexes like the Russell 1000 Value Index emphasize sectors such as financials and industrials, VFLO’s index provides exposure to sectors like healthcare and information technology while avoiding financials.
Healthcare companies made up 32.75% of the fund’s holdings and 32.61% within the Index as of June 30, 2023. Meanwhile, the sector made up 15.81% of the Russell 1000 Value Index during this period.
See more: How Free Cash Flow Reliably Indicates a Sector’s Profitability
Many healthcare companies, for example, invest heavily in innovative technologies. The sector has historically experienced above-average growth rates – The S&P 500 Healthcare Index has grown earnings faster than the S&P 500 Index (234% vs. 201%) over the past 10 years¹.
Also, these companies tend to be more defensive in nature. In market downturns, this attribute may help them to hold up better. And yet, companies in this sector don’t dominate the market the same way big tech firms do.
Michael Mack, Associate Portfolio Manager for VictoryShares and Solutions, notes that using FCF yields within an investment strategy enables investors to make value plays without a tie to cyclical or market moves.
“With healthcare, you can play value by lowering your sensitivity to economic growth. Getting value exposure through healthcare may be an attractive way to get value exposure late in an economic cycle,” states Mack.
Selecting Companies With High FCF Yields and Growth Potential
The Victory U.S. Large Cap Free Cash Flow Index (the Index) selects companies from a universe of U.S. large-cap stocks² by applying a profitability screen. It then selects companies with the highest free cash flow yields that exhibit relatively higher growth potential based on trailing and forward-looking metrics.
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/ Bloomberg; Time period of analysis 9/8/2013 – 9/7/2023
2/ The Victory U.S. Large Cap Free Cash Flow Index’s starting universe is the VettaFi 1000 Index which consists of market cap weighted U.S. large-cap stocks.
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. 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. 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.
Additional Information
The Russell 1000® Value Index is a market-capitalization-weighted index that measures the performance of Russell1000® Index companies with lower price-to-book ratios and lower forecasted growth rates.
The S&P 500® Index is a market-capitalization-weighted index that measures the performance of the common stocks of 500 leading U.S. companies.
The S&P 500® Health Care Index comprises those companies included in the S&P 500 that are classified as members of the GICS® health care sector.
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.
VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.
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