Concerns around the Federal Reserve’s ability to navigate a soft landing for the economy and signs of consumers pulling back leave investors questioning the runway for continued equity performance. Those looking to diversify their equity holdings in quality, value stocks without sacrificing growth potential may do well to consider the free cash flow (FCF) ETFs from VictoryShares.
Despite some companies beating market expectations in the first quarter, investors appeared cautious through the second quarter. Take Nvidia, for example. VictoryShares posted a strong earnings beat for the first quarter but then failed to rally substantially. The lack of a follow-through price rally after the company reported strong fundamentals may be an indication of broad investor sentiment and how investors may be feeling less confident in the outlook for equities in the second half of the year.
In an uncertain environment, quality companies become increasingly attractive because of their potential stability. Investors seeking to invest in value without sacrificing growth potential have two noteworthy options within equities.
The Next Generation of FCF Investing
FCF is a company’s remaining cash after covering all expenses. It can be used to invest in growing the business, pay dividends, or pay down debt. It can be an important metric to assess the quality of a company.
The Victory U.S. Large Cap Free Cash Flow Index and the Victory U.S. Small Cap Free Cash Flow Index seek to offer investors access to these types of quality companies with a growth tilt. They do this by focusing on those companies that demonstrate high FCF yields and apply a growth filter to remove the slowest growing companies.
The two ETFs which track these indexes are the VictoryShares Free Cash Flow ETF (VFLO) and the VictoryShares Small Cap Free Cash Flow ETF (SFLO). The index methodologies include both trailing and anticipated FCF in their calculations. This rules-based approach assesses, both, overall FCF and FCF Yield within the process.
The combination of both trailing and projected FCF allow VFLO and SFLO to provide exposure to companies with favorable forward-looking FCF metrics.
A growth screen is then applied to those companies with the highest FCF yield, which includes earnings and sales trends. Companies that make it into the underlying indexes exhibit high holistic FCF (both trailing and forward) and high growth rates.
VFLO’s net expense ratio is 0.39% (gross 0.66%), and SFLO’s net expense ratio is 0.49% (gross 0.76%).
Net expense ratios reflect the contractual waiver and or reimbursement of management fees through at least December 31, 2024.
For more news, information, and analysis, visit the Free Cash Flow Channel.
VettaFi LLC (“VettaFi”) is the index provider for VFLO and SFLO, for which it receives an index licensing fee. However, VFLO and SFLO are 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 and SFLO.
The VictoryShares Free Cash Flow ETF does not hold shares of Nvidia (NVDA) as of the latest reporting period. This stock was selected as an example above due to it being a leader across broad equity indexes.
Free cash flow (FCF) is a company’s net cash flow from operations minus capital expenditures.
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. Please note that the Funds are new ETFs with a limited history. The Funds have the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited, and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value. The Funds invest in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Funds may diverge from that of their Indexes. Investments in smaller companies typically exhibit higher volatility. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions.
The Funds could also be affected by company-specific factors that could jeopardize the generation of free cash flow. Derivatives may not work as intended and may result in losses. Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Funds’ shares. The actions of large shareholders, including large inflows or outflows, 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, 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.
Additional Information via VictoryShares
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.
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.
Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.
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