Home etftrends.com Unlocking Value: The Importance of Free Cash Flow in the Small-Cap Space

Unlocking Value: The Importance of Free Cash Flow in the Small-Cap Space

Victory Capital recently expanded its free cash flow lineup, providing investors access to the small-cap space.

The VictoryShares Small Cap Free Cash Flow ETF (SFLO) launched on December 21, 2023. The new ETF uses the same innovative methodologies employed by the VictoryShares Free Cash Flow ETF (VFLO), which captures stocks trading at a discount with favorable growth prospects but focuses exposure on the small-cap segment rather than large-cap U.S. stocks.

SFLO serves as a solution for investors looking to capitalize on companies with attractive free cash flow yields without giving up the compelling growth potential of small caps.

Free cash flow is the remaining cash a company has after accounting for operating expenses and capital expenditures. The value of a company is the present value of its future free cash flow.

Free cash flow serves as a valuable metric in evaluating companies and investment opportunities. It represents a company’s ability to grow its business, pay dividends, or pay down debt. This may be a particularly important metric in the small-cap space. Generally, companies down the cap spectrum do not generate as much free cash flow as their large-cap peers.

Notably, the smaller companies that succeed in generating high free cash flow tend to exhibit higher quality and lower valuations — attributes that make them ripe for investment.

“Many small-cap companies are struggling to produce free cash flow, adding unwanted risks,” said VettaFi’s Head of Research, Todd Rosenbluth. “This relatively new small-cap ETF from VictoryShares could potentially alleviate this issue with both a growth and a quality focus.”

Like VFLO, SFLO considers a company’s expected free cash flow, both funds focus on companies with higher current free cash flow yields and high expected growth rates.

Under the Hood of SFLO

SFLO’s underlying index, the Victory U.S. Small Cap Free Cash Flow Index, screens an initial universe of companies for historical and projected free cash flows. It then goes a step further by eliminating the slowest-growing companies to seek better outcomes in various market environments.

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

VettaFi LLC (“VettaFi”) is the index provider for VFLO and SFLO, for which it receives an index licensing fee. However, VFLO and SFLO are 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 and SFLO.


Disclosure Information

Carefully consider a fund’s investment objectives, risks, charges and expenses before investing.  This and other information can be found in the fund’s prospectus or, if available, the summary prospectus, which may be obtained by visiting the ETF prospectus page at vcm.com. Read the prospectus 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. ETF 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.

In addition to the normal risks associated with investing, 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. 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 small and mid-cap companies typically exhibit higher volatility. To facilitate commencement and/or growth of the Fund, seed investors, such as the Fund’s Adviser or one of its affiliates, a lead market maker, Authorized Participant, or other entity may contribute all or most of the assets in the Fund. If a seed investor redeems its shares, it could negatively impact the Fund’s NAV, market price and brokerage costs.

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. Small-Capitalization Stock Risk — 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.

The Victory U.S. Large Cap Free Cash Flow Index and The Victory U.S. Small Cap Free Cash Flow Index aim to select high quality large cap and small cap companies from their respective starting universes by applying profitability screens. The Indexes then select companies with the strongest free cash flow yield that exhibit higher growth. They are rebalanced and reconstituted quarterly. The Indexes calculate 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). Victory Capital Management Inc. is not affiliated with Foreside.

©2024 Victory Capital Management Inc.
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