Free cash flow (FCF), the residual money after accounting for necessary expenses, stands as a revered benchmark for investors due to its ability to signal the future performance of a company’s shares. This investing metric remains crucial in determining a company’s capability to distribute dividends, repurchase shares, reduce debt, and even initiate its growth—a reflection of the company’s potential lucrativeness.
While free cash flow stands as a linchpin indicator, the importance of cash on hand should not be undermined. The unassuming amount of capital a company holds for acquisitions, expansion, and rewarding shareholders is often a symbol of strength, setting them apart from rivals who may be financially weaker. This has been seen as a long-term path to outperformance for companies with substantial reserves.
Investors no longer need to spend countless hours sifting through financial reports in search of companies with strong balance sheets and remarkable free cash flows. Several exchange traded funds bear the burden of this search for market participants, and a number of them have notably excelled in identifying such companies. Some of the standout ETFs in this regard include:
Pacer US Cash Cows 100 ETF (COWZ)
The Pacer US Cash Cows 100 ETF (COWZ), a $19.77 billion behemoth, has excelled over the past three years, outpacing both the Russell 1000 and Russell 1000 Value indexes. The ETF screens the Russell 1000 Index for attractively valued stocks with elevated FCF yields, making it a worthy addition to any portfolio looking for a robust performer.
COWZ also provides a diverse portfolio, with none of its 101 holdings exceeding a weight of 2.34%. What’s more, the ETF lends itself as a solid idea for technology-heavy portfolios, with the tech sector modestly accounting for just 9.45% of the fund’s roster, while energy and consumer cyclical names combine for over 48% of the COWZ lineup.
The VictoryShares Small Cap Free Cash Flow ETF (SFLO), although a newcomer to the free cash flow ETF block, has already achieved significant acclaim with its unique objective of associating FCF with small-cap companies. The ETF follows the Victory U.S. Small Cap Free Cash Flow Index, aiming to select high-quality small/mid-cap companies that exhibit higher growth due to their strong free cash flow yield. This is a clear deviation from traditional wisdom, and so far, SFLO has proven skeptics wrong by outperforming the Russell 2000 Value Index.
With its weight mainly allocated to the energy, consumer discretionary, and industrial sectors, SFLO has already accumulated $39.48 million in assets under management, indicating a growing affinity among advisors and investors for the combination of FCF and small-cap stocks.
Global X U.S. Cash Flow Kings 100 ETF (FLOW)
The Global X U.S. Cash Flow Kings 100 ETF (FLOW) mirrors COWZ in its approach but with an additional focus on healthcare, materials, and technology stocks. The ETF debuted last July, presenting an index representative of domestic large-caps with above-average FCF yields compared to the broader market.
Over time, FLOW could further cement the notion that FCF investing is effective, as companies with high levels of free cash flow exhibit a higher return-on-equity and demonstrate historically lower price-to-earnings ratios. This could greatly appeal to investors, especially those inclined towards the value factor, by indicating an alignment with a strong, profitable performance.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
