How SFLO Finds Quality Companies in Volatile Small-Cap Value Investing

Unlike earnings, which can be susceptible to manipulation through accounting maneuvers, FCF is the actual cash remaining after subtracting capital expenditures (capex) from operational cash flow. As a result, FCF can serve as a cleaner measure of financial health and a more direct basis for assessing a company’s quality.

SFLO tracks the Victory U.S. Small Cap Free Cash Flow Index (the Index), which uses a rigorous multi-stage screening process. While a core broad small-cap index like the Russell 2000 might include any company within a specific market-cap range, the Index employs a quality-first approach.

The Index uses Expected FCF. Expected FCF is defined as the average of a company’s trailing 12-month FCF and consensus next-12-month forward FCF. This forward-looking component is a core differentiator from backward-looking value screens.

See More: Get Exposure to Top-Shelf Small-Cap Prospects With SFLO

By using Expected FCF, the Index targets companies with high FCF yield and characteristics associated with growth potential. SFLO’s index calculates FCF yield using enterprise value as the denominator rather than market capitalization, a choice that favors companies with stronger balance sheets.

For investors, the diversity from AI robotics to maritime shipping, highlights that the FCF factor isn’t sector specific. Instead, it is a universal marker of financial health that the Index uses to find small-cap leaders with durable FCF profiles.

1. Oscar Health Inc. (OSCR): Combines membership growth with AI-driven operational efficiency, characteristics the Index associates with expanding margins and potentially stronger free cash flow conversion.
2. Scorpio Tankers Inc. (STNG): Operating in a high-demand market for petroleum transport, Scorpio’s ability to generate FCF makes it a profile consistent with the Index’s FCF-focused methodology.
3. Symbotic Inc. (SYM): Specializing in robotic warehouse automation, Symbotic generates strong cash flow, thanks to key partnerships with retail giants like Walmart.
4. Lyft Inc. (LYFT): The ride-sharing platform has undergone a massive structural shift to prioritize cash flow over aggressive market-share expansion.
5. Tutor Perini Corp. (TPC): A backlog of large-scale civil and commercial infrastructure contracts has translated into a meaningful improvement for FCF generation in recent periods.

Higher-for-longer interest rates continue to define today’s macroeconomic backdrop. In that climate, quality is paramount for investors allocating capital to the small-cap space. Because the gap between profitable and unprofitable small-caps has widened, filtering for quality with funds like SFLO is essential.

The same FCF discipline described above becomes especially valuable when rates are elevated and capital is expensive. Holdings such as Scorpio Tankers and Oscar Health illustrate how the Index applies it in practice. The discipline results in a portfolio that may exhibit lower volatility and higher quality compared to the broader Russell 2000.

Investors can access SFLO’s FCF-driven small-cap quality approach at a net expense ratio of 0.49% and a gross expense ratio of 0.56%.

For more news, information, and analysis, visit the Free Cash Flow Content Hub

VettaFi LLC (“VettaFi”) is the index provider for SFLO, for which it receives an index licensing fee. However, SFLO 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 SFLO.

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.  The market prices of securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, or changes in interest or currency rates. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. ETFs may trade at a premium or discount to their net asset value. 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. Investments in smaller companies typically exhibit higher volatility. Index Funds invest 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.  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 of cash, may adversely affect other shareholders, including potentially increasing capital gains. 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.  Companies in the consumer discretionary sector are subject to changes in the overall international economy; interest rates; competition; consumer confidence; and individual disposable income and spending. The portfolio is also subject to the risks of product obsolescence, resource depletion and labor relations. Investments in companies in the energy sector may be subject to substantial government regulation, as well as risks involving changes in energy prices, international political instability, and liability for environmental damage and accidents resulting in loss of life or property. Derivatives may not work as intended and may result in losses. The value of your investment is also subject to geopolitical risks such as wars, terrorism, trade disputes, 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 Victory U.S. Small Cap Free Cash Flow Index aims to select high quality U.S. small-cap 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.

VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.

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