Free cash flow (FCF) is the cash a business has left over after it has paid its capital expenditures. It is also arguably a better metric to measure a company’s long-term profitability.
The sectors that have generated the highest FCF yields have historically been ones in which the value of their business comes from intangible assets and intellectual property. These are sectors like technology, consumer, and healthcare.
“Anyone can invest capital to design a smartphone,” said Michael Mack, Associate Portfolio manager at VictoryShares and Solutions. “But only the strongest brands like Apple¹ can produce one that consumers value. And that reflects as FCF on their cash flow statement.”
See more: “Why Price-To-Book Ratio Doesn’t Reflect a Company’s True Value”
Target Strong Brands with High FCF Yields Through VFLO
These companies with high FCF yields are just what the VictoryShares Free Cash Flow ETF (VFLO) may offer. VFLO seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index (the Index). The Index calculates FCF yield by dividing expected FCF by enterprise value.
Expected FCF is the average of the trailing 12-month FCF and the next 12-month forward FCF. Enterprise value measures a company’s total value. Its use is often as a more comprehensive alternative to equity market capitalization.
The Index aims to select companies from a universe² of U.S. large-cap stocks by applying a profitability screen. It then selects companies with the highest free cash flow yields that exhibit relatively higher growth potential based on trailing and forward-looking metrics.
While the fund’s Index includes tech, consumer, and healthcare companies, it screens out the real estate and financial sectors. That’s because FCF is an operating metric irrelevant to real estate or financial businesses.
“A bank must reinvest any excess cash flow generated to earn a return, or they lose money,” Mack said. “Same with real estate.”
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/ The VictoryShares Free Cash Flow ETF does not hold Apple, Inc (AAPL) as of the latest reporting period as of 9/30/2023. For a full list of holdings, please visit VFLO’s product page.
2/ The Victory U.S. Large Cap Free Cash Flow Index’s starting universe is the VettaFi 1000 Index which consists of market cap weighted U.S. large-cap stocks.
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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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