Are Pharmaceuticals Poised for a Rebound? The Key Metric to Keep in Mind
With pharmaceutical M&A ramping up and robust pipelines with high impact launches on the horizon, investors may be considering renewed exposure to this subset of Health Care stocks. However, those focused on free cash flow (FCF) metrics may have already identified opportunities in the sector. VictoryShares Free Cash Flow ETF (VFLO) currently offers exposure to this area of the market that could be worth consideration.
VFLO’s top holding as of March 9, 2026 is a pharmaceutical company showing potential upside: Merck & Co Inc. (MRK). As of this date, VFLO held MRK at a 4.66% position. There is no guarantee that VFLO will continue to hold the security or if held, at what percentage.
MRK ended Q4 on a positive note, topping quarterly estimates, while its CEO provided his outlook for 2026.
“In 2025, we continued to advance leading-edge science to deliver transformative medicines and vaccines that are improving health outcomes for patients around the world,” said Rob Davis, chairman and CEO. “Our business benefited from demand for our innovative portfolio, including for KEYTRUDA, increasing contributions from new launches in cardiometabolic and respiratory as well as vaccines, and strong performance of Animal Health…”
Rob Davis, Chairman & CEO, Merck – Our Q4 and full-year 2025 financial results
These types of outlook-oriented statements can help spark investor confidence. However, balance sheets can provide insight into a company’s financial strength. FCF can help investors cut through the noise — the metric reveals a company’s remaining cash after deducting operating expenses. Merck is a company that has exhibited strong FCF generation.
Free Cash Flow as a Financial Indicator
From a macro perspective, there are indicators that investors monitor when assessing the outlook for the pharmaceutical industry. These indicators can range from interest rate cuts that can fuel more mergers and acquisition deals to potential deregulation aimed at improving industry efficiency. These factors may suggest improving sentiment toward the pharmaceutical companies. However, FCF is an indicator that can span across all sectors. That’s because of its concentrated focus on a company’s cash flow regardless of the industry in which it operates. As of the end of 2025, MRK had posted strong FCF with attractive growth prospects, in turn, making it recently the largest holding in VFLO.
VFLO tracks the Victory U.S. Large Cap Free Cash Flow Index (the “Index”), which screens companies based on expected FCF. This is represented by both trailing and forward-looking measures of a company’s FCF. Rather than relying solely on trailing cash flow data, the Index aims to identify companies that may continue generating strong cash flow. The Index also has a built-in growth filter, screening out the slowest-growing companies. This combination of screening for high expected FCF and growth potential helps identify securities like MRK with ample FCF, which the VictoryShares and Solutions team believes may support long-term business investment and growth.
Holdings are subject to change and should not be construed as investment advice or a recommendation to buy, sell, or hold any security.
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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 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. VFLO 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. 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 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. The profitability of companies in the healthcare sector may be affected by government regulations and healthcare programs, fluctuations in the cost of, and demand for, medical products and services and product liability claims. Derivatives may not work as intended and may result in losses. The Fund may frequently change its holdings, resulting in higher fees, lower returns, and more 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 U.S. Large 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 VFLO, for which it receives an index licensing fee. However, VFLO 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 VFLO.
