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SFLO Rebalance Boosts Free Cash Flow Yield

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Investors may be looking within the small- and mid-cap space for the value-tilt many of these companies offer. Add in their growth potential and small-cap companies are worth consideration.

Determining which small-cap stocks to include, however, can prove challenging. Because of their smaller market cap, these businesses are more susceptible to economic drawdowns and pullbacks. Screening for a company’s FCF, both historically as well as forward-looking, estimates can provide a holistic snapshot of a company’s health.

Free cash flow 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. Free cash flow can be a good indicator of a company’s overall health, historically and currently. The Victory U.S. Small Cap Free Cash Flow Index that underlies the VictoryShares Small Cap Free Cash Flow ETF takes that one step further and looks at FCF forward-looking estimates and also applies a growth filter to identify those companies with strong growth potential.

Under the Hood of SFLO’s Free Cash Flow Strategy

The VictoryShares Small Cap Free Cash Flow ETF (SFLO) seeks to track an index, before fees and expenses that provides exposure to small-cap companies with high FCF yield. The fund is a relative newcomer, having launched in December 2023. The Victory U.S. Small Cap Free Cash Flow Index’s first quarterly rebalance was in March and the outcome underscores the methodology’s unique approach to capture growth within FCF companies.

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Before its rebalance, the Victory U.S. Small Cap Free Cash Flow Index’s estimated three- to five-year earnings per share growth was 8.8. After rebalancing, that estimate rose to 10.2. Forward FCF yields also rose, from 9.13 to 10.12 after the rebalance. The fund’s index keeps it growth-oriented on a forward-looking basis.

SFLO seeks to provide exposure to small-cap companies that demonstrate high-quality and favorable growth potential. The ETF includes companies with high FCF yields and the highest expected growth rates within their category. The holistic approach to FCF identifies not just favorable companies now but those positioned favorably looking ahead.

The ETF is also able to minimize constraints by pulling from a larger initial universe of 2,500 companies via the VettaFi US Equity Mid/Small-cap 2500 Index. This is a wider universe than many funds in the same class that draw from the Russell 2000, providing greater liquidity, which in turn increases trading efficiency.

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.

SFLO Rebalance Boosts Free Cash Flow Yield
Holdings are subject to change.

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.

For more news, information, and analysis, visit the Free Cash Flow Channel.

Price-to-earnings (P/E) measures a company’s value. It’s calculated by dividing the stock price by the earnings per share. Earnings per share (EPS) measures a company’s profitability. It’s calculated by subtracting preferred dividends from the company’s net income and then dividing by total shares outstanding.

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.

All investing involves risk, including the potential loss of principal. Please note that the Fund is a new ETF with a limited history. The Fund 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 Fund invests 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. 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. Investments in mid-cap companies typically exhibit higher volatility. 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

Investments in small-capitalization companies involve greater risks than those associated with larger, more established companies. Free Cash Flow Risk—Investing in companies with high free cash flows could lead to underperformance during periods when such investments are unpopular, and fluctuations in market conditions, industry disruptions, or company-specific factors may jeopardize the generation of free cash flow. Fund holdings and sector allocations are subject to change, may differ from the Index, and should not be considered investment advice.

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.

Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc., the Fund’s investment adviser.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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