Free cash flow is the cash a company generates after its cash outflows to pay expenses or support operations. FCF Advisors specializes in free cash flow investment strategies, primarily through its Free Cash Flow Quality Model, such as that underpinning the ETF, TTAC.
The FCF US Quality ETF (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.
Because of its focus on free cash flow, TTAC was overweight to technology and energy versus the Russell 3000 at the end of August (by 8.66% and 3.9%, respectively), while underweight industrials and communication services (-3.83% and -4.84%, respectively).
Meanwhile, FCF Advisors recently revealed that TTAC was overweight energy companies like Ovinitiv (by 0.93%) and Magnolia Oil & Gas Corp. (0.9%), while underweight stocks like Google parent Alphabet (-1.52%), Microsoft (-1.58%), Tesla (-1.77%), and Amazon (-2.85%).
“By taking a forward-looking, fundamental approach to security selection, TTAC’s holdings are distinct from what advisors would find in a market-cap weighted index ETF,” said Todd Rosenbluth, head of research at VettaFi.
Bob Shea, CEO and CIO of FCF Advisors, told VettaFi that his firm believes that while “GAAP earnings have significant disadvantages,” and “accounting practices allow a lot of leeway and discretion to management… The ability to manipulate and distort free cash flow is a lot more difficult than with earnings.”
“Free cash flow is so important right now, given that the allocation environment has gotten exponentially more difficult in 2022,” Shea said. “Cohorts have never seen an environment like this. In a difficult environment, people want to make sure they understand what they own.”
Shea also pointed out that FCF Advisors focuses on free cash flow profitability, which is operating cash flow after capital expenditures, rather than free cash flow yield, which compares free cash flow and market cap.
For more news, information, and strategy, visit the Free Cash Flow Channel.