It may feel like a challenge to capitalize on innovative technology. After all, the ARK Innovation ETF (ARKK) is down nearly 63% year-to-date, and tech giants like Facebook and Amazon are down 67% and 45%, respectively. Plus, it’s probably not helping that inflation remains sky high.
So, in such an environment, investors may want to seek risk-managed exposure to U.S. all-cap companies with strong free cash flow and R&D investments. Free cash flow is the cash a company generates after its cash outflows, such as maintenance of capital assets, and it represents the cash that a company has ready and available to use on repaying creditors or sending out dividends to investors.
That’s where the Donoghue Forlines Risk Managed Innovation ETF (DFNV) can come into play. The companies targeted by DFNV represent the top 25% of the eligible universe based on quality of earnings, profits generated from R&D, degree of R&D investment relative to total assets, asset turnover, and financial leverage.
Target weight is allocated to each security based on the combination of the five factors and market cap. Based on the target weight, the index selects up to 120 names or until 90% of the cumulative security weight has been included, whichever occurs first.
To provide downside protection during bearish market conditions, DFNV uses a rules-based model that allows the fund to invest up to 50% of its assets to U.S. Treasuries and other cash equivalents based on the daily buy-sell signal.
DFNV has outperformed ARKK by nearly 4,000 basis points YTD.
“R&D spending combined with strong free cash flow generation has facilitated the emergence of new leaders in global markets,” according to ETF issuer FCF Advisors. “Technology and healthcare are ingrained in all sectors of the global economy, erasing the distinction of stand-alone ‘innovation’ sectors. This has the potential to alter the way returns are produced in the equity markets.”
DFNV has an expense ratio of 0.69%.
For more news, information, and strategy, visit the Free Cash Flow Channel.