First Trust Advisors has launched a new ETF that invests in large-cap companies with high free cash flow (FCF) yield. The First Trust S&P 500 Diversified Free Cash Flow ETF (NYSE Arca: FCFY) seeks to replicate the performance of the S&P 500 Sector-Neutral FCF Index. FCFY targets companies in the S&P 500 with the highest relative FCF yield within each Global Industry Classification Standard (GICS) sector.
FCF is the cash remaining after a company has paid day-to-day operating expenses. FCF can be used to fund dividends and stock buybacks, pay down debt, or pursue projects to bolster profitability. Additionally, FCF yield — FCF compared to some measure of company value such as Enterprise Value — can be used to compare FCF for various stocks.
Enduring Challenges Through Strong Free Cash Flows
“In our view, companies with strong free cash flows may be better equipped to endure some of the challenges of a weakening economy and higher interest rate environment,” said Ryan Issakainen, ETF Strategist at First Trust. “We believe FCFY may be an effective core holding for those seeking exposure to the strongest, most profitable stocks in the S&P 500 Index, while also avoiding significant sector biases.”