International equities can serve several portfolio objectives, including access to sectors and growth opportunities unavailable domestically and potential diversification from U.S.-centric risks.
When analyzing international equities, investors may benefit from evaluating the strength of a company’s free cash flow (FCF). One approach to accessing companies screened using FCF metrics is the VictoryShares International Free Cash Flow Growth ETF (GRIN ). FCF is a metric used to evaluate a company’s ability to reinvest excess funds, pay dividends, or repurchase shares.
Victory Capital client portfolio manager Michael Mack shared his thoughts recently with TMX VettaFi Head of Sector & Industry Research Roxanna Islam when discussing AI, valuations, and concentration risks. In general, Mack discussed why FCF can be an important component to identify true value when evaluating equities. This also goes for identifying opportunities outside the U.S.
Mack presented a notable point of analysis during the conversation that highlighted the disparity between the Russell 1000 Growth Index’s FCF and the MSCI EAFE Index’s FCF. International companies have been increasing the FCF they generate over the past five years, catching up to U.S. companies. “When we’re talking with advisors, we’re asking them if they have considered diversifying outside of the U.S., where most clients are probably underweight.”
Targeting Overseas Growth
GRIN’s index methodology provides access to international growth equities using a FCF as the driving factor of security inclusion. The ETF tracks the Victory International Free Cash Flow Growth Index (the Index). It seeks to capture high-growth, large-cap international companies with the potential to compound FCF generation over time.
Like other FCF-focused ETFs in the VictoryShares lineup, GRIN’s indexed approach uses FCF as a forward-looking metric, combining trailing 12-month FCF with projected estimates to assess potential cash generation trends and divides that by invested capital. FCF divided by Invested Capital, also called FCF return on invested capital (FCF ROIC), measures how efficiently a company turns the capital invested in its business into spendable cash flow. By incorporating these measures, the Index seeks to highlight companies demonstrating strong FCF characteristics across international markets.
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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 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. International investments can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic developments and can perform differently from U.S. investments. Investments concentrated in a single country, a small number of countries or a specific region may be particularly affected by adverse markets, rates, and events, which may occur in those countries and regions and typically exhibit higher volatility. The Fund is new with a limited operating history. As a result, it does not have a record of performance or other dealings for prospective investors to evaluate when making investment decisions. 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. 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. Investments in companies in the industrials sector, including producers of durable goods and companies that process raw materials, may be adversely affected by changes in supply and demand for products and services, governmental regulation and changes in spending policies, world events and economic conditions. 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. Diversification does not assure a profit or protect against loss.
The Victory International Free Cash Flow Growth Index measures the performance of profitable companies that generate high free cash flow from invested capital and display higher growth characteristics. The index is subject to sector and security weight constraints. The constituents are weighted by modified absolute momentum.
The MSCI EAFE Index measures the performance of large- and mid-cap stocks in the developed markets, excluding the U.S. and Canada. The index covers approximately 85% of the free-float-adjusted market capitalization in each country.
VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.
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VettaFi LLC (“VettaFi”) is the index provider for GRIN, for which it receives an index licensing fee. However GRIN 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 GRIN.
