Investors remained mindful of valuations and concentration risk within major equity benchmarks during the second half of 2024. When looking to diversify equity exposures with quality strategies, understanding what a fund owns may help investors avoid adding further “Magnificent Seven” concentration.
Just a handful of technology companies known as the Magnificent Seven (Mag 7) carried the S&P 500 higher for much of June, according to Bloomberg data. Only 3.1% of constituents reached one-month highs as of June 14, 2024, despite the fact that broad indexes continued to cross record-setting prices. The Mag 7 comprises Nvidia, Apple, Amazon, Meta Platforms, Netflix, Alphabet, and Microsoft.
Meanwhile, increasingly, more companies lag within the major equity benchmark. Approximately one-third of S&P 500 companies hit a one-month low as of June 14, 2024.
Increased concentration risk and valuation concerns within big-name growth companies may prompt investors to look to value and quality strategies to diversify their portfolios. However, some quality strategies may increase portfolio concentration instead of helping to alleviate it. It is increasingly important to know and understand what’s going on under the hood of an investment.
How to Diversify Beyond the Mag 7 When Quality Investing
Advisors and investors may associate the quality factor with reliable, profitable companies across economic cycles. Such companies could prove attractive in the current environment of mixed economic signals, geopolitical risk, election year risk, and more.
Understanding how a quality strategy works from a methodology standpoint and what holdings it has could help investors avoid unintentionally enhancing their Mag 7 exposures. By investing in such funds, investors further enhance their exposures to these growth giants.
The VictoryShares Free Cash Flow ETF (VFLO) invests in quality companies with high free cash flow (FCF) yield and tracks the Victory U.S. Large Cap Free Cash Flow Index (the Index). FCF yield considers a company’s enterprise value or total value, including debt. It’s calculated by dividing the cash left over after paying capital and operating expenses by the enterprise value.
VFLO offers notable diversification from the major growth names in core equity strategies and currently has no exposure to the growth-centric technology companies that comprise the Mag 7. Top holdings for the ETF include Gilead Sciences, Inc., Expedia Group, Inc., and Cigna Group as of 6/30/24.
When screening companies, the Index methodology calculates FCF holistically by including both trailing and expected FCF. The Index also applies a growth filter that seeks to screen out companies with high FCF but with weak growth prospects.
VFLO carries a net expense ratio of 0.39% and a gross expense ratio of 0.66%.
Net expense ratios reflect the contractual waiver and or reimbursement of management fees through at least October 31, 2024.
Holdings are subject to change without notice.
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.
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 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 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 Fund 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 Fund’s 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.
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.