Originally published on May 21, 2024
Markets remain highly responsive to economic data as concerns around Fed policy and high interest rates dominate the second quarter so far. Increasing bond yields due to high or rising interest rates have historically put pressure on equity markets, so investors looking for opportunity in this type of environment may do well to consider free cash flow strategies.
Free cash flow (FCF) is the remaining cash a company has after covering all expenses. It can be used to invest in growing the business, pay dividends or pay down debt.
The team at VictoryShares has developed an FCF methodology which measures FCF yield holistically by including a company’s trailing as well as anticipated FCF. In addition to this measure of FCF, the methodology applies a growth filter based on earnings. The inclusion of future FCF and earnings allows the strategy to offer forward-looking exposure to high-quality companies, trading at a discount with favorable growth prospects.
“Free cash flow is the cash left over after a company has paid its expenses, taxes, interest, and reinvested in the business,” Michael Mack, associate portfolio manager for VictoryShares and Solutions stated. “The higher rates are already reflected in FCF's calculation that includes all of a company's debt in the current rate environment, so the companies that are generating cash flows may be more likely to withstand higher interest rates.”
Consider Investing in FCF Companies With Confidence Amid High Rates
VictoryShares provides access to quality companies with high FCF yields through two recently launched FCF-centric ETFs: the VictoryShares Free Cash Flow ETF (VFLO) and the VictoryShares Small Cap Free Cash Flow ETF (SFLO).
Quality companies may offer the potential for reliable performance and income in an uncertain market environment. These two VictoryShares ETFs are particularly well-positioned in the current macro environment, given their focus on company health and their growth tilt.
VFLO seeks to track an index, the Victory U.S. Large Cap Free Cash Flow Index, which offers investors access to quality companies with high FCF yields.
SFLO’s Index, the Victory U.S. Small Cap Free Cash Flow Index, seeks to provide exposure to small-cap companies with high FCF yield. Rather than pulling stocks from the Russell 2000 Index, the Index pulls from a larger initial universe of 2,500 companies via the VettaFi US Equity Mid/Small-cap 2500 Index. This helps to expand the selection of stocks to those that have more liquidity.
Both methodologies offer exposure to companies with favorable forward-looking FCF estimates and employ a growth screen for securities included, providing a forward-looking, growth-oriented solution to FCF investing.
VFLO carries a net expense ratio of 0.39% (gross expense ratio of 0.66%). SFLO carries a net expense ratio of 0.49% (gross expense ratio 0.76%).
Net expense ratios reflect the contractual waiver and or reimbursement of management fees through at least December 31, 2024.
For more news, information, and analysis, visit the Free Cash Flow Channel.
VettaFi LLC (“VettaFi”) is the index provider for VFLO and SFLO, for which it receives an index licensing fee. However, VFLO and SFLO 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 VFLO and SFLO.
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 these Funds are new ETFs with limited histories. The Funds 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 Funds invest in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Funds may diverge from that of the Indexes. 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.
Additional Information
The Victory U.S. Small 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.
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.
Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.
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