The current environment may present an attractive entry point for small-cap free cash flow (FCF) strategies.
Small-cap companies have historically experienced significant pricing inefficiencies during periods of enhanced market volatility, creating potential opportunities for active managers to identify mispriced securities,” according to Michael Mack, client portfolio manager for Victory Capital. “These inefficiencies often emerge when market participants overreact to short-term uncertainty, causing small-cap valuations to disconnect from their fundamental business prospects, which can be exacerbated by liquidity constraints.”
This might unveil a compelling opportunity for long-term investors, as they could buy at a discount now and potentially benefit from a rebound in small-cap companies that generate high levels of FCF.
While small-cap stocks could continue to see losses in the current environment, characterized by heightened volatility, they tend to be more resilient than expected and bounce back once they do reach the bottom, according to Mack.
Under the Hood of Victory Capital’s Small-Cap FCF ETF
The VictoryShares Small Cap Free Cash Flow ETF (SFLO) tracks the Victory U.S. Small Cap Free Cash Flow Index (the Index), which includes companies that have historically generated high FCF yield. FCF is the cash a company has after it has paid its expenses. Companies use this money to invest in paying dividends, paying down debt, or growing their business. Also, FCF is considered one component of measuring a company’s health. FCF yield is a financial ratio that standardizes the FCF per share a company is expected to earn compared to its market value per share.
The Index screens for both current FCF and anticipated FCF. A growth screen is then employed to help remove the slowest-growing companies. Additionally, the Index methodology incorporates robust liquidity requirements designed to maximize trading efficiency.
To help mitigate some potential issues when investing in small-cap companies, the Index begins with a large universe of 2,500 companies, which helps minimize liquidity constraints. Additionally, the Index also eliminates the bottom 10% of securities based on liquidity.
SFLO, launched in December 2023 and has $278 million in assets under management as of June 27, 2025.
For more news, information, and analysis, visit the Free Cash Flow Content Hub.
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 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. 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. 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. 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 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.
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 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.
