While several economists had hoped that falling gas prices would curb inflation, the latest figures from the Consumer Price Index revealed that record-high inflation hadn’t gone away. The CPI showed that prices were up 8.3% in August compared to 12 months earlier, as price increases on food and housing persist.
Analysts and investors fear that this means that the Federal Reserve will continue its aggressive path of raising rates. In fact, some believe the Fed’s next rate raise will be even more aggressive than previous hikes.
With the Fed likely to continue to raise interest rates aggressively, the liquidity squeeze already occurring in markets will be exacerbated. So, investors may want to reinforce their portfolios by targeting companies with solid free cash flow characteristics.
Free cash flow is the cash left over after a company has paid expenses, interest, taxes, and long-term investments. It is used to buy back stocks, pay dividends, or participate in mergers and acquisitions.
FCF Advisors specializes in free cash flow investment strategies, primarily through its Free Cash Flow Quality Model. They have been focused on free cash flow factors since 2011 and are specialized in multi-factor fundamental analysis grounded in decades of research. Two exchange-traded funds that FCF Advisors offer that specialize in free cash flow include the FCF US Quality ETF (TTAC) and the FCF International Quality ETF (TTAI).
TTAC aims to outperform the Russell 3000 through a fundamentals-driven investment process that selects about 150 stocks based on free cash flow strength. Its holdings are then weighted by a modified market-cap log transformation, allowing increased exposure to companies with the strongest proprietary free cash flow rankings.
TTAI, meanwhile, aims to outperform the MSCI All Country World Index ex the U.S. through an active investment process. A quant model is used to rank stocks based on proprietary measures of free cash flow. Highly leveraged firms that incur debt to buy back shares, or don’t satisfy ESG criteria, are screened out. Roughly 150 of the highest-ranked stocks are selected and then weighted on a modified market-cap basis that factors in free cash flow and log transformation.
Both ETF portfolios will also 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.
For more news, information, and strategy, visit the Free Cash Flow Channel.