Historically, value stocks have tended to outperform growth companies for nearly a century, based on Fama/French Research.¹ However, value investing has a few challenges over the shorter time horizon. For one thing, growth has outpaced value for more than six years annually, creating a short-term setback. Also, both growth and value go through long cycles in each direction, potentially creating another headwind.
In addition, investors tend to abandon a certain investing style after a cycle if it doesn’t perform well. Michael Mack, Associate Portfolio Manager for VictoryShares and Solutions, thinks that’s the worst time to abandon value.
“Right now, some compelling valuation opportunities have emerged in the value space,” Mack stated. “This includes the potential to secure growth companies at attractive, value-based prices granting investors the opportunity to strategically position themselves to benefit from the intersecting realms of value and growth.”
See more: “Sectors Like Healthcare Take Center Stage in the VFLO Index’s Pursuit of Value”
Free Cash Flow Is What Truly Matters
On a webcast hosted by VettaFi, Mack said that a company’s value is determined by “the present value of its future cash flows.”
Free cash flow (FCF) is a company’s cash after paying its capital expenditures. Its use is to buy back stocks, pay dividends, or participate in mergers and acquisitions. According to Mack, strong FCF allows companies to engage in shareholder-friendly actions.
“It’s important to focus on what truly matters, which is free cash flow,” Mack states.
The VictoryShares Free Cash Flow ETF (VFLO) tracks an index that seeks to capture profitable U.S. large-cap companies with high FCF yields. The Victory U.S. Large Cap Free Cash Flow Index (the Index) selects companies from a universe of U.S. large-cap stocks² by applying a profitability screen. It then selects companies with the highest FCF yields that exhibit relatively higher growth potential based on trailing and forward-looking metrics.
While value indexes like the Russell 1000 Value Index emphasize sectors such as financials and industrials, VFLO’s Index provides exposure to sectors like healthcare and information technology while avoiding financials and real estate.
For more news, information, and analysis, visit the Free Cash Flow Channel.
VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO 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 VFLO.
 The Victory U.S. Large Cap Free Cash Flow Index’s starting universe is the VettaFi 1000 Index, which consists of market-cap-weighted U.S. large-cap stocks.
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 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 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.
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.
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. The securities highlighted, if any, were not intended as individual investment advice.
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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