Why Free Cash Flow ETF, SFLO, Stands Out Amid the Small-Cap Rally

• Small-cap equities can be especially vulnerable in elevated interest-rate environments due to steep debt-servicing costs, leaving traditional market-cap-weighted strategies exposed to unprofitable companies.
• SFLO seeks to address this risk by tracking an index that screens a 2,500-stock universe for liquidity, underlying profitability and financial strength.
• By blending trailing and 12-month forward FCF estimates with a growth filter, SFLO isolates high FCF-yielding small-cap companies with strong internal liquidity while limiting single-stock and sector concentration risks.

See More: How SFLO Finds Quality Companies in Volatile Small-Cap Value Investing

Small-cap stocks have historically faced severe headwinds in high-rate regimes due to elevated debt servicing costs. Because many small-cap companies can rely heavily on financing to run their operations, rising yields can directly squeeze profit margins. This can make finding profitable opportunities in small caps a difficult task. A simple market-cap-weighted index, such as the Russell 2000, cannot reliably surface those opportunities because it is weighted by size rather than profitability. However, SFLO’s indexed approach is designed to identify high-FCF-yielding small caps, a cohort with strong fundamentals and healthy balance sheets. For investors seeking targeted exposure to small caps regardless of the interest-rate environment, SFLO offers a systematic approach that prioritizes operational efficiency over simple market-cap weighting.

SFLO tracks the Victory U.S. Small Cap Free Cash Flow Index (the Index), whose core value proposition is a focus on FCF. This represents the remaining cash a company has after covering all expenses. We believe FCF can serve as a clear barometer of fundamental quality, supplying small-cap firms with internal liquidity to pay down debt, reinvest in growth or distribute dividends without turning to external financing.

Unlike conventional value benchmarks relying on historical metrics, the Victory U.S. Small Cap Free Cash Flow Index applies a forward-looking selection process across a 2,500-stock U.S. small-cap universe. The Index applies a four-step screen:

1. Profitability & liquidity gating — filters for profitable companies and eliminates the bottom 10% by average daily trading volume.
2. Comprehensive FCF analysis — ranks and isolates the top 300 stocks by combining trailing 12-month and forward 12-month FCF estimates.
3. Growth filter — removes high-FCF names with weak growth prospects, stripping out potential value traps.
4. Diversification caps — limits single-stock and sector exposure to reduce concentration risk.

This structural approach is designed to systematically reduce single-stock and sector concentration risks while capturing small-cap value with favorable growth prospects. By screening for the highest FCF yields (measured against enterprise value rather than market cap), SFLO targets what we believe to be cash-generative leaders trading at a discount and offers a systematic framework for navigating high-rate environments such as now.

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VettaFi LLC (“VettaFi”) is the index provider for SFLO, for which it receives an index licensing fee. However, SFLO is 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.

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. The market prices of securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, or changes in interest or currency rates. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. ETFs may trade at a premium or discount to their net asset value. 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. Investments in smaller companies typically exhibit higher volatility. Index Funds invest in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Fund may diverge from that of the Index. 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 of cash, may adversely affect other shareholders, including potentially increasing capital gains. Investments concentrated in an industry or group of industries may face more risks and exhibit higher volatility than investments that are more broadly diversified over industries or sectors. Companies in the consumer discretionary sector are subject to changes in the overall international economy; interest rates; competition; consumer confidence; and individual disposable income and spending. The portfolio is also subject to the risks of product obsolescence, resource depletion and labor relations. Investments in companies in the energy sector may be subject to substantial government regulation, as well as risks involving changes in energy prices, international political instability, and liability for environmental damage and accidents resulting in loss of life or property. Derivatives may not work as intended and may result in losses. The value of your investment is also subject to geopolitical risks such as wars, terrorism, trade disputes, 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.

The Victory U.S. Small Cap Free Cash Flow Index aims to select high quality U.S. small-cap 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.

VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.

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