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Put Cash to Work in Free Cash Flow Strategies

In an investing environment rife with risk, one of the top investment trends of the last year centers around increased cash on the sidelines. However, there may be value in putting some of that cash to work in free cash flow (FCF) strategies this year.

Many investors currently sit in higher cash allocations than usual in their portfolios. Election year risk, interest rate risk, inflation risk, geopolitical risk — everywhere you turn, there’s cause for defensive positioning.

Elevated Valuation and Earnings Risk in Broad Equities

Investors must contend with additional risks within equities. Valuation risk in the major indexes and the uncertainty surrounding how long earnings resilience will continue to persist weigh heavily on investors’ minds this year.

Using the S&P 500® Index to discuss broad equities, the S&P generated a price-to-earnings (P/E) ratio of 24.39 as of 05/01/2024, according to YCharts. Price to earnings measures a company’s share price to its earnings per share and is one method of determining value. Much of the elevated valuation comes from just a handful of mega-cap companies such as NVIDIA (P/E ratio of 71.92 as of 05/02/2024). Should valuations begin to revert to the mean, it could create potential losses for those who are invested.

Additionally, company resilience in an elevated rate environment and the potential for consumer weakness looms over future earnings. Looking ahead, declining earnings remain a risk for both companies and investors.

Value investing may offer a tool against valuation and declining earnings risk. In particular, companies with high FCF might offer investors a way to build in defensive positioning within an equity portfolio.

Quality companies, such as those with high FCF, offer the potential for reliable performance and income in an uncertain market environment. The VictoryShares Free Cash Flow ETF (VFLO) seeks to track the Victory U.S. Large Cap Free Cash Flow Index. The Index includes quality companies with high FCF yields. Investors wanting to put some excess cash to work can consider dollar cost averaging into an ETF, such as VFLO.

Dollar Cost Average Into Quality FCF Companies

FCF 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 and is often used to measure a company’s health.

Should valuations decline, an ETF like VFLO may be well-positioned compared to broad equities. VFLO has an average P/E ratio of 14.68 as of 5/31/24, measured over the previous 12 months. This can be compared to the Russell 1000 Value Index’s P/E of 20.49 over the same time period. While falling earnings would affect the ETF, it has less exposure to companies with high valuations. A dollar-cost-averaging approach to investing could be considered given the strong fundamentals that characterize the companies in this ETF and the relatively low P/E.

Primary sector allocations for VFLO included energy (24.83%), health care (23.75%), and consumer discretionary (16.02%) as of 5/31/2024.

VFLO’s Index methodology calculates FCF holistically, including both trailing and anticipated FCF based on analyst estimates. Once companies are screened for high FCF yield, the Index process employs a growth screen, giving this forward-looking approach a growth-oriented tilt to FCF investing.

VFLO carries a net expense ratio of 0.39% (gross expense ratio of 0.66%).

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. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.

Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of an investment. It is no guarantee against loss in a declining market.

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. 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. 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. 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

The Victory U.S. Large 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. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.

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