When seeking growth investments, advisors and investors find themselves with an ever-expanding array of strategies to choose from. However, for those with an eye for capturing sustainable growth, ETFs like the VictoryShares Free Cash Flow Growth ETF (GFLW) that focus on return on invested capital are worth consideration.
Return on invested capital (ROIC) measures how effectively a company generates profits from the capital invested in its business. When analyzed alongside free cash flow (FCF), it provides insight into both the efficiency of those investments and the company’s ability to generate cash beyond its operating and capital needs. FCF is the cash a company generates from its operations that is left over after paying for all its operating expenses and capital expenditures. It represents the money that can be used for discretionary purposes, such as paying down debt, distributing dividends to shareholders, or investing in growth opportunities, without impacting its core operations. In other words, ROIC allows investors to better understand how much value a company is generating, and whether its growth is sustainable.
“The idea is, the more effective a business is at converting capital into cash flows, the faster it is able to grow sustainably,” explained Michael Mack, client portfolio manager for Victory Capital.
Companies that grow in a way that overextends their ROIC are generally forced to rely on stock issuance and debt to fund their growth. “That can be unsustainable versus companies that are generating higher returns on capital,” Mack said. Companies with high ROIC “most likely will not need the capital, so they can grow without relying on the market.”
By looking to a company’s FCF ROIC, advisors and investors may better understand a company’s growth potential.
Using Return on Invested Capital to Seek Profitable Growth
GFLW seeks to track the Victory Free Cash Flow Growth Index (the Index), which is designed to identify companies that can grow profitably by reinvesting capital at high rates of return. By using FCF ROIC, the Index aims to select companies capable of sustaining growth without eroding shareholder value.
The process begins with a starting universe of 1,000 companies via the VettaFi 1000 US Large Cap Index, excluding financials and real estate. It then uses a rules-based methodology and screens for positive FCF growth by selecting those with a positive five-year trend, removing those with persistent negative growth.
From there, companies are ranked on FCF relative to ROIC, narrowing the field to the top 150 businesses with the greatest potential to reinvest efficiently and grow without overreliance on debt or dilution. This is a key step that connects profitability with cash generation, helping to identify companies that don’t just expand but expand in a sustainable way.
Next, the methodology refines the list by evaluating future growth prospects, ultimately selecting the top 100 companies positioned for durable growth. These final holdings are weighted based on FCF size and momentum, ensuring the portfolio adapts as cash flow leaders shift over time.
By systematically linking ROIC and FCF, the Index seeks to give investors targeted exposure to companies that generate strong cash flows, reinvest effectively, and grow shareholder value over the long term. GFLW carries an expense ratio of 0.39% and a gross expense ratio of 0.58%.
Net expense ratios reflect the contractual waiver and/or reimbursement of management fees through October 31, 2026.
For more news, information, and analysis, visit the Free Cash Flow Content Hub.
VettaFi LLC (“VettaFi”) is the index provider for GFLW, for which it receives an index licensing fee. However, GFLW 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 GFLW.
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. 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. 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. 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. 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 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 indices are subject to sector and security weight constraints. The constituents are weighted by modified absolute momentum.
You cannot invest directly in an index.
VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.
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