Some exchange traded funds focus on companies that are prodigious generators of free cash and Pacer ETFs is one of the leading issuers on that front. Late last year, the issuer launched the Pacer US Cash Cows 100 ETF (BATS: COWZ).
COWZ tries to reflect the performance of the Pacer US Cash Cows 100 Index, which is comprised of large- and mid-cap U.S. companies with high free cash flow yields, or those commonly referred to as “cash cows.”
The underlying index selects companies from the Russell 1000 Index and screens those based on average projected free cash flows and earnings over each of the next two fiscal years, excluding financial companies other than real estate investment trusts.
Dividend investors should note COWZ and its stablemates focus “on free cash flow yields, it will not generate the highest distributions. What the fund shows us is that the healthiest companies are not necessarily the ones that pay the highest dividends,” according to a Seeking Alpha analysis of COWZ.
At the end of the second quarter, COWZ had a free cash flow yield of almost 8.5% compared to 3.6% on the Russell 1000 Index, according to Pacer data. The ETF has a dividend yield of 2.3%, which is higher than the S&P 500 and the fund’s methodology and emphasis on cash flow gives it the potential to post long-term dividend growth that outpaces that of the Russell 1000.
“Well, for one it is too early to tell if it will outperform the broader index. Looking at Pacer’s literature, they cite a number of studies, including one from FactSet which looks at the performance of the Russell 1000 components based on FCF yield,” according to Seeking Alpha. “From that study, we can see that from 1991 through 2016, the top 10% of the Russell 1000 components based on FCF yield achieved the highest annualized returns.”
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Component companies are then ranked by free cash flow yield for the trailing twelve month period, and equity securities of 100 companies with the highest free cash flow yield are included in the underlying index. Holdings are also weighed in proportion to their trailing twelve month free cash flow with a capped 2% of the weight of the index for any individual company.
COWZ allocates 58% of its combined weight to technology and consumer discretionary stocks. The ETF is up 5.4% year-to-date.
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