If an investor had to choose between two companies with the same valuation, it would make sense to select the one that’s growing faster. At least that’s the philosophy behind the VictoryShares Free Cash Flow ETF (VFLO).
VFLO targets profitable U.S. large-cap companies with high free cash flow (FCF) yields by seeking to track the performance of the Victory U.S. Large Cap Free Cash Flow Index. The Index aims to select high-quality companies from its starting universe by applying profitability screens.
The Index then selects companies with the highest FCF yields that exhibit relatively higher growth potential. This is based on trailing and forward-looking metrics. Its growth filter selects the top 50 stocks with the highest expected growth score. Measurements for the growth score come from sales trends, EBIDTA growth, and long-term earnings growth.
See more: “Considering Value as Part of the Bigger Picture”
When Assessing Value, Growth is Integral
VictoryShares and Solutions Associate Portfolio Manager Michael Mack said, “Growth is always a component in the calculation of value.”
According to Mack, a common mistake is that many investors have failed to consider growth when seeking value within the marketplace.
“When looking at a universe of high FCF yield companies, over time, the highest growers generated a significantly higher return than the slowest growers,” he said.
Mack added that integrating forward-looking FCF yields with VFLO’s growth filter “seeks to improve upon traditional approaches to free cash flow yield.”
While indices like the Russell 1000 Value Index focus on sectors like financials and industrials to measure value, VFLO’s Index offers exposure to healthcare and information technology sectors, steering clear of financials and real estate where FCF may not be as relevant.
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.
EBITDA is a company’s earnings before interest, taxes, depreciation, and amortization (EBITDA)— and provides a record of the amount of money a company generated during a period, before deducting interest costs and taxes, and before taking into account the depreciation and amortization of assets.
 This Index calculates FCF yield by dividing expected FCF 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.
 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.
 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 updates on an annual basis.
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.
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.
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.