Free cash flow (FCF) represents the cash a company generates after accounting for cash payments to support operations and maintain its capital assets. It allows companies to reinvest cash, pay dividends, or repay debts.
The VictoryShares Free Cash Flow ETF (VFLO) invests in profitable U.S. large-cap companies with high FCF yields. It seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index1.
The Index methodology looks to assess FCF on a historic and forward-looking basis. The ETF’s index identifies companies with a high FCF yield. These companies are then assessed using a growth filter to eliminate the slowest-growing companies.
See more: “Why Companies With Strong Free Cash Flow Are Often Self-Sufficient”
When Calculating Value, Growth Is Always a Component
In a webcast hosted by VettaFi, VictoryShares and Solutions Associate Portfolio Manager Michael Mack said that value and growth are often considered “to be in opposition” to one another.
“Most analysts feel they must choose between two approaches customarily thought to be in opposition: value and growth,” Mack noted in reference to a Warren Buffett quote. “But growth is always a component in the calculation of value.”
“If you look at a lot of valuation strategies, they have tended to ignore growth when it comes to identifying value in the marketplace,” Mack added. “Over time, the highest growers generated a significantly higher return than the slowest growers2.”
Mack argued that combining forward-looking FCF yields with VFLO’s growth filter “seeks to improve upon traditional approaches to free cash flow yield.”
For more news, information, and analysis, visit the Free Cash Flow Channel.
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.
Notes:
1/ 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. You cannot invest directly in an index.
2/ Source: FactSet; Victory Capital Analysis from 12/31/1991 – 6/30/2023 where the highest expected free cash flow yielding quintile of stocks was broken out by the fastest growers which returned 17.59% vs the slowest growers which returned 12.95%. Expected FCF is the average of trailing 12-month FCF and next 12-month forward FCF. Universe utilized for analysis is the S&P 500 Index with equal weighted constituents (excluding Financials and Real Estate). The case study shown above is updated on an annual basis. The Victory U.S Large Cap Free Cash Flow Index’s growth filter selects the top 50 stocks with the highest expected growth score. The growth score is measured by sales trend, EBIDTA growth and long-term earnings growth.
Important 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 fund is a new ETF with a limited history. The Fund has 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 Fund invests 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. 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.
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 Fund’s shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. Investments in mid-cap companies typically exhibit higher volatility. 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
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. The securities highlighted, if any, were not intended as individual investment advice.
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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