Should You Tap Cash Cow ETFs to Counter Volatility?

Theglobal marketis currently at a critical juncture right now. The pandemic-driven supply-chain woes and the resultant red-hot inflation, the Russia-Ukraine war and the resultant hit to the commodity market as well as the central banks’ policy tightening in the developed world may push the global economy into recession over the medium term, if we go by some analysts.

China went back to lockdown mode due to the spike in COVID-19 cases. With its key manufacturing city Shenzhen being locked down, the supply-chain woes have compounded even more. The probability of a U.S. recession in the next year may be as high as 35%, according to economists at Goldman Sachs Group Inc. per a Bloomberg article, quoted on Yahoo Finance. There’s a 35% chance that the S&P 500 could fall into a bear market, per Bank of America, as quoted on CNBC.

So, with a number of deterrents doing the rounds in the 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 upon trustworthy stocks. In this regard, a high free-cash-flow yield approach can be fascinating.

Time to Bet on Cash Cows?

Per Investopedia, “a cash cow can 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.

Since we know that a cash cushion is always needed in a rough market, one can easily look at the indicators related to cash flows to measure a company's performance. One important factor 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, genuinely diagnosing a company's financial health.

Pacer Financial is extensively exploring this area. It has a cash cow series with Pacer Global Cash Cows Dividend ETF GCOW, Pacer US Cash Cows 100 ETF (COWZ), Pacer US Small Cap Cash Cows 100 ETF CALF and Pacer Developed Markets International Cash Cows 100 ETF ICOW.

Pacer doesn’t just focus on free cash flow though, as the company looks at free cash flow yield as one of the most important metrics. This ensures that the fund does not focus just on the largest companies which are producing the free cash flow, but those that are generating cash in a robust way when compared to their enterprise values.

ETFs in Focus

Pacer Global Cash Cows Dividend ETF (GCOW)

The underlying Pacer Global Cash Cows Dividend Index uses an objective, rules-based methodology to provide exposure to global companies with high dividend yields backed by a high free cash flow yield. United States (32.33%), United Kingdom (18.74%) and Japan (13.97%) hold the top three spots in the fund. The fund charges 60 basis points (bps) in fees and yields 4.11% annually.

Pacer US Cash Cows 100 ETF (COWZ)

The underlying Pacer US Cash Cows 100 Index uses an objective, rules-based methodology to provide exposure to large and mid-capitalization U.S. companies with high free cash flow yields. It charges 49 bps in fees and yields 1.45% annually.

Pacer US Small Cap Cash Cows 100 ETF (CALF)

The underlying Pacer US Small Cap Cash Cows Index uses an objective, rules-based methodology to provide exposure to small-capitalization U.S. companies with high free cash flow yields. It charges 59 bps in fees and yields 2.81% annually.

Pacer Developed Markets International Cash Cows 100 ETF (ICOW)

The underlying Pacer Developed Markets International Cash Cows 100 Index uses an objective, rules-based methodology to provide exposure to large and mid-capitalization non-U.S. companies in developed markets with high free cash flow yields. Japan (24.20%), United Kingdom (17.22%) and France (12.49%) hold the top three spots in the fund. The fund charges 65 bps in fees and yields 2.21% annually.

Infrastructure Stock Boom to Sweep America

A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.

The only question is “Will you get into the right stocks early when their growth potential is greatest?”

Zacks has released a Special Report to help you do just that, and today it’s free. Discover 5 special companies that look to gain the most from construction and repair to roads, bridges, and buildings, plus cargo hauling and energy transformation on an almost unimaginable scale.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.