In the current investment environment where value upside is trending, a return to fundamentals is back in the limelight. When it comes to fundamental analysis, cash is king and one ETF, the Pacer US Small Cap Cash Cows 100 ETF (CALF), focuses on just that.

CALF seeks to track the total return performance, before fees and expenses, of the Pacer US Small Cap Cash Cows Index. Under normal circumstances, at least 80% of the fund’s total assets (exclusive of collateral held from securities lending) will be invested in the component securities of the index.

The index uses an objective, rules-based methodology to provide exposure to small-capitalization U.S. companies with high free cash flow yields. With a 0.59% expense ratio, or $5.90 for every $1,000 invested, investors in CALF get access to a fund focusing on:

  • Free Cash Flow: Free cash flow is the cash remaining after a company has paid expenses, interest, taxes, and long-term investments. It can be used to buy back stock, pay dividends, or participate in mergers and acquisitions.
  • Free Cash Flow Generation: A company’s ability to generate a high free cash flow yield indicates a company is producing more cash than it needs to run the business and can invest in growth opportunities.
  • Higher Growth Prospects: Small cap companies offer a variety of opportunities including exposure to companies with higher growth that are often under-researched.
  • Strong Fund Performance: CALF is up 32% year-to-date.

CALF Chart

The Timing Is Right for CALF

With the Russell 2000 up 15% year-to-date, the timing couldn’t be more auspicious for CALF. However, simply deep diving into a fund that tracks the Russell 2000 may not generate as much upside as a fund like CALF.

Since not all stocks that comprise the Russell 2000 are strong performers, CALF is able to suss out the most strategic companies. As such, ETF investors will get broad-based exposure to companies that:

  1. Exhibit the Highest Quality: CALF focuses only on quality small cap companies with high free cash flow yield.
  2. Are trading at a Discount: Exposure to opportunities in the market where high quality stocks are trading at a discount.
  3. Exhibit Long-Term Capital Appreciation: Using free cash flow yield to measure the sustainability of a company may produce potentially higher returns and more attractive upside/downside capture over time.

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