Advisors and investors turn to quality stocks for various reasons across market cycles. Whether hedging for risk, enhancing portfolio diversification or seeking reliable income, quality stocks align with a range of investment strategies. When seeking strategies focusing on quality, investors would do well to consider the VictoryShares free cash flow (FCF) ETFs.
VictoryShares combines quality, FCF investing, and a growth tilt in the VictoryShares Free Cash Flow ETF (VFLO) and the VictoryShares Small Cap Free Cash Flow ETF (SFLO). This combination creates a diversified portfolio within the quality category that could benefit advisors and investors.
Quality companies generally offer relatively consistent performance across market cycles, potentially making them an attractive hedge during market stress or drawdown periods. As these companies are generally less likely to go out of business according to Morningstar, they offer the potential for reliable income across business cycles. Given growth stock outperformance for much of the year, quality companies may offer diversification benefits for portfolios currently overweight growth names.
One measure of quality, FCF, is the remaining cash a company has left after paying for its expenses. It’s often used to invest in growing the business, pay dividends, or pay down debt.
VictoryShares considers FCF and FCF yield when investing in quality companies. FCF yield considers a company’s enterprise value or total value, including debt. It calculates the cash left over after paying capital and operating expenses by the enterprise value. FCF yield has been a valuation metric that’s outperformed historically and with less risk when compared to other traditional valuation metrics1.
Image source: VictoryShares
In the period between 12/31/1999 through 6/30/2023, those S&P 500 companies in the highest quintile for trailing FCF yield outperformed the broader S&P 500 Index, VictoryShares reported. What’s more, using forward-looking expected FCF yield generated even more significant outperformance.
Quality With a Growth Screen Boosts Return Potential
The VictoryShares Free Cash Flow ETF (VFLO) invests in quality companies with high FCF yield and tracks the Victory U.S. Large Cap Free Cash Flow Index. Meanwhile, the VictoryShares Small Cap Free Cash Flow ETF (SFLO) seeks to track the Victory U.S. Small Cap Free Cash Flow Index. The indexes provide exposure to companies with high FCF yield.
When screening companies, the indexes methodologies calculate FCF holistically by including both trailing and expected FCF. The indexes also apply a growth filter to screen out companies with high FCF but weak growth prospects. The inclusion of the growth filter boosts the return potential of the FCF strategy. For example, in VFLO this translates to an additional 150 basis points when screening for growth.
VFLO carries a net expense ratio of 0.39% (gross expense ratio of 0.48%). SFLO carries a net expense ratio of 0.49% (gross expense ratio of 0.87%).
Net expense ratios reflect the contractual waiver and/or reimbursement of management fees through October 31, 2025.
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.
Free cash flow (FCF) is a company’s net cash flow from operations minus capital expenditures.
Disclosure Information
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 Funds are new ETFs with a limited history. The Funds have 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 Funds invest in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Funds may diverge from that of their Indexes. Investments in smaller companies typically exhibit higher volatility. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions.
The Funds could also be affected by company-specific factors that could jeopardize the generation of free cash flow. 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 Funds’ shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. 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 Victory U.S. Small Cap Free Cash Flow Index aims to select high-quality companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly. This Index calculates free cash flow yield by dividing expected free cash flow 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.
The Victory U.S. Large Cap Free Cash Flow Index aims to select high-quality companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly. This Index calculates free cash flow yield by dividing expected free cash flow 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.
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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