Investors looking stocks that are prodigious generators of cash flow have a new exchange traded product to turn to: The Pacer US Cash Cows 100 ETF (BATS: COWZ), which debuted last month.
The new ETF tries to reflect the performance of the Pacer US Cash Cows 100 Index, which is comprised of large- and mid-cap U.S. companies with high free cash flow yields, or those commonly referred to as “cash cows.”
The underlying index selects companies from the Russell 1000 Index and screens those based on average projected free cash flows and earnings over each of the next two fiscal years, excluding financial companies other than real estate investment trusts.
COWZ “tracks the Pacer US Cash Cows 100 Index, which screens equities based on their average projected free cash flows and earnings, if available, over two fiscal years. The companies are ranked by their trailing 12-month free cash flow yield and the 100 companies with the highest free cash flow yields are included in the index,” according to a statement issued by Pacer.
An ETF that emphasizes free cash may seem like a niche idea, but it is a concept with merit.
Cash flow is “a measure that’s less easily manipulated than traditional measures such as earnings per share so it tends to be a truer measure of corporate performance. Companies that generate billions of dollars in free cash flow annually are able to pay all of their bills, pay down debt if appropriate, reinvest back into the business and reward shareholders. Companies with higher free cash flow yields tend to have the added benefit of being excellent value candidates and having above average dividend yields,” according to a Seeking Alpha analysis of COWZ.
Free cash flow is a measure of a company’s financial performance as calculated by operating cash flow minus capital expenditures. The measure marks the cash available after spending the money required to maintain or expand its asset base. Companies with high free cash flow also have more leeway to grow dividends over time.
“Examining the methodology of creating the portfolio, the Cash Cows 100 ETF identifies the top free cash flow yields from the Russell 1000 over the trailing 12 month period and weights them accordingly with no single holding counting for more than 2% of the total portfolio. Sticking with the top 10% of FCF yields in the large- and mid-cap space should keep shareholders squarely in the sweet spot,” adds Seeking Alpha.
For more information on new fund products, visit our new ETFs category.