As Tech Sector Sees Massive Flows, Don’t Overlook FCF Exposure

Investors are continuing to plow assets into the tech sector, leaving many portfolios underexposed to value stocks.

Flows remain heavily skewed toward tech at the sector level. The sector has seen over $17.5 billion in inflows over the past year as of February 27, according to Strategas ETF Research. At the same time, all other sector-focused ETFs have net outflows totaling $17.5 billion. This underscores the unbalanced allocation to the tech sector.

Although tech stocks have generated attractive returns recently, investors may be best positioned by maintaining an all-weather portfolio. Recent accounts have demonstrated that growth (Russell 1000 Growth Index) will win some years. Meanwhile, value (Russell 1000 Value Index) will win in others. Many investors are unable to properly time the market and end up missing out on returns on both sides.

Large-cap growth performance, like the Russell 1000 Growth Index, can be particularly volatile during periods of high valuations, according to Michael Mack, associate portfolio manager for VictoryShares and Solutions. Currently, high valuations are a key theme in the current U.S. market. Historically, when investors get nervous about valuations, they may opt to seek out companies with high free cash flow yields and low valuations.

See more: “What’s the Right Way to Assess Free Cash Flow?”

Therefore, long-term investors may be able to enhance returns by maintaining a well-diversified portfolio and incorporating the VictoryShares Free Cash Flow ETF (VFLO). One can use this ETF as a key tool to enhance value exposure and complement growth exposure.

Incorporating VFLO to Enhance Tech Sector Exposure

VFLO can work as a suitable complement to a growth allocation in a portfolio, it uses free cash flow as a metric and captures stocks trading at a discount with favorable growth prospects. Contrary to broad, market cap-weighted benchmarks like the S&P 500 that tilt exposure toward growth stocks, VFLO can provide quality and value exposure.

Notably, when U.S. large-cap growth underperformed the market in 2022, as represented by the Russell 1000 Growth Index, the free cash flow yield segment outperformed1. The large-cap growth styles of investing and VFLO may tend to work in opposite directions, making them an ideal pair, effectively creating an all-weather portfolio.

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. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.

1/ Source: Victory Capital Research, FactSet

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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.