When seeking companies that generate high free cash flow (FCF) yields, sectors matter. Take technology, for example. This sector includes, in the words of Michael Mack , Associate Portfolio Manager for VictoryShares and Solutions,, “the largest and strongest companies.” This is where the “FAANG” stocks, which represent actual securities, and the “Magnificent 7” stocks reside, after all.

Mack noted that many large-cap technology firms often have higher profit margins. “Technology and productivity go hand-in-hand,” he said. “Technological advancements have caused the cost of computing to decline, driving a surge in profitability for many of these companies.”

See more: “Considering Value as Part of the Bigger Picture”

This is because a lot of the value from large tech firms comes from their intangible assets. You can’t necessarily put a price on an algorithm. VictoryShares argues that FCF is good at identifying the strongest companies with the greatest growth potential.

“FCF has been able to the capture the growth in these companies, while other metrics like book value haven’t,” Mack said.

Catching Quality With VFLO

The challenge now, however, is that there are many large-cap tech stocks whose prices have gone up more than their FCF. This has caused the FCF yields to drop.

The VictoryShares Free Cash Flow ETF (VFLO) seeks to invest in profitable U.S. large-cap companies with high FCF yields. As of November 30, information technology stocks comprised 9.28% of the Russell 1000 Value Index[1]. By comparison, they made up 11.62% of VFLO’s Index[2].

VFLO’s index applies a profitability screen. It then selects companies with the highest FCF yields that exhibit relatively higher growth potential based on trailing and forward-looking metrics.

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.

[1] https://advisor.vcm.com/products/victoryshares-etfs/victoryshares-etfs-list/victoryshares-free-cash-flow-etf

[2] The Victory U.S. Large Cap Free Cash Flow Index.

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 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 Russell 1000^® Value Index is a market-capitalization-weighted index that measures the performance of Russell1000® Index companies with lower price-to-book ratios and lower forecasted growth rates.
Free cash flow (FCF) is the cash remaining after a company has paid its expenses, taxes, interest, and long-term investments.
“FAANG” is an acronym that refers to the stocks of five prominent American technology companies: Meta (META) (formerly known as Facebook), Amazon (AMZN), Apple (AAPL), Netflix (NFLX); and Alphabet (GOOG) (formerly known as Google). 
The “Magnificent Seven” is a term that describes the seven biggest technology-focused companies that have led the market’s returns in recent years.
Book value is a company’s equity value as reported in its financial statements. The book value figure is typically viewed in relation to the company’s stock value (market capitalization) and is determined by taking the total value of a company’s assets and subtracting any of the liabilities the company still owes.

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.

For the VictoryShares Free Cash Flow ETF’s current holdings click here.

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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