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Finding funds that offer growth potential and value is key to building a solid portfolio. And finding companies that have high free cash flow is key to longevity. Free cash flow is king. And a fund that is a king at This space is the VictoryShares Free Cash Flow ETF (NASDAQ:VFLO). This ETF stands out as a great option as it provides access to top-tier 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.
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VFLO tracks the Victory US Large Cap Free Cash Flow Index. This index picks quality companies through earnings filters and selects those with the best free cash flow performance and expected growth. VFLO was launched in June 2023, making it a relative newcomer to the ETF scene, but it has already garnered a lot of attention. attention given its good performance from the beginning.
A look at holdings
VFLO's portfolio consists of companies with high free cash flow yields and strong growth potential. No single position represents more than 4.51% of the portfolio, with the top 10 holdings accounting for 35%.
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What do these companies do? Gilead Sciences Inc. is a biopharmaceutical company known for its innovative treatments in fields such as HIV and liver disease. Gilead’s ample cash flow helps fund its extensive research and development work, making it a key player in VFLO’s investment mix. Expedia Group Inc. is a leading online travel company, also with strong free cash flow. Cigna Group is a global health services company. Zoom makes video calling software. The company is using its extra cash to grow its services and technology setup. And Lennar Corp. builds homes and is a big name in this space.
These companies together represent a wide range of industries, adding to VFLO's balanced approach to growth and value investing. The resulting portfolio of 50 free cash flow-weighted stocks results in a very different mix of sectors than we see in the S&P 500.
Sectoral allocation
VFLO invests the majority of its money in the healthcare, consumer discretionary, and energy sectors. The healthcare sector accounts for approximately 28.37% of the fund, with companies such as Gilead and Cigna providing stability and room for growth. The consumer discretionary and energy sector includes large companies such as Expedia and Lennar that help shape the fund’s active allocation process based on free cash flow screening.
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Peer comparison
VFLO differs from other similar ETFs, such as 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 combination of value and growth. This approach gives VFLO the potential to outperform 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 its inception. The caveat here is that it’s only been a year so far. Nonetheless, it’s encouraging to see.
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Pros and cons
On the plus side, the fund focuses on free cash flow, meaning it picks companies that are in good financial shape and can reinvest money into growing their business. This strategy can lead to better returns over time when markets value cash flow. Additionally, VFLO spreads its investments across different sectors, which helps reduce the risks that come with downturns in specific industries. I like the mix of energy and healthcare that it has here. This is a very different portfolio than most that you find with heavy exposure to technology.
There are potential downsides to consider, however. VFLO’s status as a new ETF means it lacks a long track record, which could put off cautious investors. Also, its concentration on large-cap U.S. stocks could miss the global diversity some investors desire. Market shifts that reduce the value of free cash flow metrics could hurt VFLO’s performance compared to other investment approaches. And free cash flow now doesn’t mean free cash flow later, so active rebalancing, if not frequent enough, could miss some things.
Conclusion
Overall, the VictoryShares Free Cash Flow ETF looks like an attractive investment option for those looking to add 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 does carry some risks because it is new and invests in U.S. companies, the potential benefits make it worth considering for investors looking to boost their portfolio from a fundamental perspective that is different than market-cap weighting.
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