Several factors, from high inflation to the war in Ukraine to a hawkish Federal Reserve, have led markets to yo-yo this year. The S&P 500 dropped nearly 14% year-to-date as of the end of July. So, with stocks priced lower now than they were at the start of the year (but beginning to gain in value), investors are seeking undervalued stocks with high free cash flows.
Free cash flow represents the cash a company has available to use on repaying creditors or sending dividends to investors. Todd Rosenbluth, head of research at VettaFi, said: “Given the market volatility in 2022, advisors have sought out companies with strong free cash flow generation, as they provide relative stability.”
The FCF US Quality ETF (TTAC) is an actively managed fund that aims to outperform the Russell 3000 through a fundamentals-driven investment process that selects about 150 stocks based on free cash flow strength, according to the ETF’s FactSet Analyst Report. Its holdings are then weighted by a modified market-cap log transformation, which allows for increased exposure to companies with the strongest proprietary free cash flow rankings.
After that, the portfolio will be rated with an ESG score, excluding companies with low ESG ratings. Firms with an extreme rise in shares count and increase in leverage are excluded.
TTAC rose in value by nearly 7% during the month of July.
Active domestic equity managers do their best work during volatile markets. According to Morningstar, 62.9% of U.S. equity funds beat their benchmarks through the end of May. For the category, the average excess return was 1.36%. Investors are also putting money into active ETFs, particularly domestic equity funds.
Citing FactSet data as of June 30, the New York Stock Exchange revealed that active equity ETFs brought in $30.7 billion in investor capital in the year’s first half.
For more news, information, and strategy, visit the Free Cash Flow Channel.