While large-cap growth stocks continue to lead the market, advisors are looking for alternatives such as small-cap value funds. One of the more popular ETFs this year has been the Pacer US Small Cap Cash Cows 100 ETF (CALF). As of mid-July, CALF has gathered $3 billion in 2024, pushing its asset base up to close to $9 billion.
CALF follows a similar free cash flow approach to the large-cap Pacer US Cash Cows 100 ETF (COWZ). Free cash flow is the cash remaining after a company has paid expenses, interest, taxes, and long-term investments. Such cash can be used to support dividends, share repurchases, and acquisitions. Free cash flow yield has been a useful measure of valuation.
The Pacer Cash Cow Approach
COWZ owns 100 of the Russell 1000 constituents ranked based on trailing 12-month free cash flow yield. The $23 billion ETF was up 4.5% year to date as of July 10, lagging the 7.2% gain for the iShares Russell 1000 Value ETF (IWD). Top holdings include AT&T, Cheniere Energy, Diamondback Energy, and Hewlett Packard Enterprise.
Meanwhile, small-cap CALF owns the 100 high-free-cash-flow-yielding stocks from the S&P Small Cap 600 Index. The weighted average market capitalization was $2.8 billion and the portfolio had a free cash flow yield of 10.4% as of March 2024. CONSOL Energy, Mueller Industries, Signet Jewelers, and SkyWest were some top positions. Given CALF’s size, there have been some concerns of future performance challenges given the ETF’s large ownership of less liquid stocks.
Victory Takes a More Forward-Looking Approach
In December 2023, Victory Capital expanded its own free cash flow suite. The firm launched the VictoryShares Free Cash Flow ETF (VFLO) in June 2023. Just over one year later, assets in the large-cap focused ETF had climbed to approximately $500 million. Like VFLO, the VictoryShares Small Cap Free Cash Flow ETF (SFLO) has a forward-looking, growth-titled free cash flow approach.
Starting with a universe of profitable and relatively liquid small- and midcaps, SFLO selects 200 stocks. These are chosen for having high trailing, as well as expected, free cash flow yields and relatively strong growth prospects according to the index methodology.
As of March 2024, the weighted average market cap for SFLO was $4.2 billion. The portfolio had a free cash flow yield of 9.9%, but a sales growth rate of 12%. While SFLO was also heavily exposed to consumer discretionary, energy, and industrials stocks, what’s inside the fund was different. Chord Energy, Dillard’s, Scorpio Tankers, and Vista Outdoor were some recent top-10 holdings after the quarterly rebalance.
Not All Small-Cap ETFs Perform the Same
The distinct free-cash flow approach SFLO takes has helped thus far in 2024. While CALF was down 11% in value as of mid-July, SFLO was up 1.6%. Meanwhile, the iShares S&P 600 Small Cap Value ETF (IJS) declined 5.1%. Though SFLO has a modestly lower expense ratio (0.49% versus 0.59% for CALF), what’s inside the ETFs and why explains the short-term performance differential. With just over $50 million in assets, we think SFLO is an under-the-radar ETF.
VettaFi LLC (“VettaFi”) is the index provider for SFLO and VFLO, for which it receives an index licensing fee. However, SFLO and VFLO are 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 SFLO or VFLO.
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