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Finding funds that offer growth potential and value is key to building a strong portfolio. And finding companies that have high free cash flow is key to longevity. Free cash flow is king. And one fund that’s a king in this space is the VictoryShares Free Cash Flow ETF (NASDAQ:VFLO). This ETF stands out as a great option, giving access to top-notch companies with strong free cash flow metrics. This fund appeals to investors who want to balance their portfolios with a mix of growth and value stocks.
VFLO tracks the Victory U.S. Large Cap Free Cash Flow Index. This index chooses quality companies through profit screens and picks those with the best free cash flow yield and expected growth. VFLO started in June 2023 making it a newcomer to the ETF scene, but it’s already caught a lot of attention given its strong performance out of the gate.
A Look At The Holdings
VFLO’s portfolio consists of companies with high free cash flow yields and strong growth potential. No position makes up more than 4.51% of the portfolio, with the top 10 making up 35%.
What do these companies do? Gilead Sciences Inc. is a biopharmaceutical company that stands out for its groundbreaking treatments in fields such as HIV and liver diseases. Gilead’s hefty cash flow helps fund its wide-ranging research and development work, making it a key player in VFLO’s investment mix. Expedia Group Inc. is a top online travel business, also with strong free cash flow. Cigna Group is a global health service company. Zoom makes video call software. The company uses its extra cash to grow its services and tech setup. And Lennar Corp. builds homes and is a big name in this field.
These companies together show a wide range of industries, adding to VFLO’s balanced way of investing for growth and value. The resulting portfolio of 50 stocks weighted by free cash flow results in a very different sector mix than what we see in the S&P 500.
Sector Allocation
VFLO puts most of its money in the Healthcare, Consumer Discretionary, and Energy sectors. Healthcare makes up about 28.37% of the fund, with companies like Gilead and Cigna providing stability and room to grow. Consumer Discretionary and Energy includes big companies like Expedia and Lennar helping to shape the fund’s active allocation process based on the free cash flow filtering.
Peer Comparison
VFLO differs from similar ETFs, like the Russell 1000 Value Index, in several ways. Both funds aim to find value stocks, but VFLO stands out by focusing on free cash flow metrics, offering a mix of value and growth. This approach gives VFLO the potential to perform better when free cash flow drives stock performance. When we compare VFLO to the iShares Russell 1000 Value ETF (IWD), we find that VFLO has outperformed since inception. The caveat here is that it’s only been a year so far. Encouraging to see, nonetheless.
Pros and Cons
On the plus side, the fund zeros in on free cash flow, which means it picks companies that are in good financial shape and can put money back into growing their business. This strategy can result in better returns over time when markets value cash flow. On top of that, VFLO spreads its investments across different sectors, which helps to lower the risks that come with downturns in specific industries. I like the heavy Healthcare and Energy mix here. This is a very different portfolio than most of what you encounter that has heavy Tech exposure.
Yet, there are possible drawbacks to consider. VFLO’s status as a new ETF means it lacks an extended track record, which might put off cautious investors. Also, its concentration in U.S. large-cap stocks could leave out the global diversity some investors want. Market shifts that reduce the value of free cash flow metrics could affect how VFLO performs compared to other investment approaches. And free cash flow now doesn’t mean free cash flow later, so the active rebalancing if not frequent enough could miss out on things.
Conclusion
Overall, the VictoryShares Free Cash Flow ETF looks like an attractive investment option for people who want to add both growth and value to their portfolios. Its focus on free cash flow metrics puts it in a good position to find high-quality companies that have strong growth potential. While it comes with some risks because it’s new and invests in U.S. companies, the possible benefits make it worth thinking about for investors who aim to boost their portfolio from a fundamental perspective that’s different than market-cap weighting.
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