Growth indexes may not necessarily be the best way to find the next growth leaders. When seeking stocks with the greatest growth potential, their future free cash flow (FCF) may be a more successful metric than relying solely on an index’s criteria for inclusion.
FCF is the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets. It can be used to buy back stock, pay dividends, or participate in mergers and acquisitions.
According to VictoryShares and Solutions’ Senior Portfolio Manager, Scott Kefer, many of today’s high-flying growth stocks were once deeply out of favor value stocks trading at high FCF yields.
“The market tends to underestimate a company’s ability to reinvent itself and find new growth markets,” Kefer said. “You don’t have to limit your horizon to the growth indexes in order to identify future growth leaders.”
See more: “Is Free Cash Flow the Most Relevant Metric for Profitability?”
Find Companies With Favorable Growth Prospects With VFLO
The VictoryShares Free Cash Flow ETF (VFLO) tracks an index focused on large-cap companies with high free cash flows. These companies are then filtered to select those with the most favorable growth prospects using trailing and forward-looking metrics.
VFLO seeks to provide investment results that track the performance of the Victory U.S. Large Cap Free Cash Flow Index¹ (the Index). The Index aims to select large-cap companies from the universe² by applying a profitability screen. It then selects companies with the highest free cash flow yields that exhibit relatively higher growth potential based on trailing and forward-looking metrics.
The Index screens an initial universe of companies. This excludes those classified as Financials and Real Estate, using a combination of trailing and forward-looking free cash flow. It then eliminates companies with the worst growth characteristics to seek better outcomes in a variety of market environments.
The outcome is a 50-stock portfolio consisting of companies with the highest combination of free cash flow yields and growth rates³ to be included in the Index that is reconstituted and rebalanced every quarter.
For more news, information, and strategy, 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.
Disclosure Information
Free cash flow (FCF) represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets.
1/ 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.
2/ 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.
3/ Growth rate is defined as the long-term sales growth trend defined as an average of 5-years historical and 2-years forward sales growth.
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.
Additional Information
All investing involves risk, including the potential loss of principal. 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.
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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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.
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