The global markets may be hitting highs but risk factors prevail thanks to overvaluation concerns, uncertainty over the Fed rate hike, the yet-unseen impact of Brexit and oil price volatility. So, with plenty of deterrents still doing rounds in an apparently strong market, it is wise to look for quality while picking stocks.
Market watchers and participants are thus trying out different valuation indicators and running screeners to land up on trustworthy stocks. In this regard, a high free-cash flow yield approach can be fascinating.
Since we know that a cash cushion is always needed in a rough market, one can easily take a look at the indicators related to cash flows to measure the performance of a company. One of the important factors that makes free cash flow a highly dependable metric is that operating cash flow adds back non-cash charges such as depreciation and amortization to net income, truly diagnosing the financial health of a company.
Pacer Financial is greatly exploring this area. It has a cash cow series with Pacer Global Cash Cows Dividend ETFGCOW and Pacer US Cash Cows 100 ETFCOWZ already in place and lately broadened this lineup with the launch of Pacer US Small Cap Cash Cows 100 ETF CALF and Pacer Developed Markets International Cash Cows 100 ETF ICOW (read: 4 ETFs to Profit Out of Cash Kings ).
What is a Cash Cow?
As per Investopedia , "a cash cow can also refer to a business, product or asset that, once acquired and paid off, will produce consistent cash flow over its lifespan." In other words, these companies are known for continuous positive cash flows, reflecting their inherent strength (read: Trump Rally to Wane? Buy These Quality ETFs ).
Inside the Recently Launched Funds
ICOW in Focus
This international fund will track the Pacer Developed Markets International Cash Cows 100 Index to give exposure to large and mid-cap non-U.S. companies in developed markets having high free cash flow (FCF) yields. The underlying index initially chooses stocks from the FTSE Developed ex US Index.
The FCF yield of the index is 7.21% annually (higher than FTSE Developed ex-US Index's yield of 3.33%) and P/E ratio is 12.39x (lower than the parent index's 17.54x). No stock accounts for more than 2.36% of this 100-stock fund. The fund charges 65 bps in fees.
CALF in Focus
As the name suggests, the fund follows the S&P SmallCap 600 index to pick the top 100 companies based on free cash flow yield. Its FCF is 9.68% (higher than the parent index's 3.23% yield) and P/E ratio is 18.37x (lower than the parent index's 23x). The fund is heavy on Consumer Discretionary (38.27%), Information Technology (20.86%) and Industrials (17.87%). The fund charges 59 bps in fees.
The newly launched funds may not face stiff competition now apart from TrimTabs Float Shrink ETF TTAC which looks to beat a U.S. equity index, not the international gauges. This fund picks companies that are " generating free cash flow and reducing their share count." However, Pacer funds may see tough pressure if TrimTabs' planned set of free cash flow funds hit the market (read: Ten Predictions for the ETF Industry in 2017 ).
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