Take Note of This Storming Cash Cows ETF | ETF Trends

Investors who are looking for a quality investment strategy to diversify their portfolios may consider an exchange traded fund strategy that focuses on cash cows or companies with a history of generating solid cash flows.

The Pacer US Cash Cows 100 ETF (NYSEArca: COWZ), which screens the Russell 1000 for the top 100 companies based on free cash flow yield, has increased 19.4% over the past month.

The cash cows index strategy is based on the premise of free cash flow, or the cash remaining after a company has paid expenses, interest, taxes, and long-term investments. This extra cash can be used to buy back stock, pay dividends, or participate in mergers and acquisitions.

“The 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,” according to Pacer ETFs.

The Pacer US Cash Cows 100 Index tracks a basket of high quality U.S. equities, specifically targeting U.S. companies with strong cash flows and healthy balance sheets. The strategy also provides exposure to opportunities in the market where high quality stocks are trading at a discount. Furthermore, these companies with a high free cash flow yield have the ability to grow dividends over time.

These so-called cash cow companies tend to have lower debt ratios and cleaner balance sheets overall. They also have greater flexibility to take advantage of strategic opportunities through targeted acquisitions or merger prospects. And, if there is nothing better, they can still return value to investors by increasing dividend payments to shareholders.

COWZ currently shows a 2.94% 12-month yield and trades at an attractively priced 12.1 price-to-earnings and 1.6 price-to-book. In comparison, the S&P 500 has a 1.9% 12-month yield and shows a 21.1 P/E and 3.0 P/B.

For more information on alternative index-based strategies, visit our smart beta category.