When seeking companies that generate high free cash flow (FCF) yields, sectors matter. Take technology, for example. This sector includes, in the words of Michael Mack , Associate Portfolio Manager for VictoryShares and Solutions,, “the largest and strongest companies.” This is where the “FAANG” stocks, which represent actual securities, and the “Magnificent 7” stocks reside, after all.
Mack noted that many large-cap technology firms often have higher profit margins. “Technology and productivity go hand-in-hand,” he said. “Technological advancements have caused the cost of computing to decline, driving a surge in profitability for many of these companies.”
See more: “Considering Value as Part of the Bigger Picture”
This is because a lot of the value from large tech firms comes from their intangible assets. You can’t necessarily put a price on an algorithm. VictoryShares argues that FCF is good at identifying the strongest companies with the greatest growth potential.
“FCF has been able to the capture the growth in these companies, while other metrics like book value haven’t,” Mack said.
Catching Quality With VFLO
The challenge now, however, is that there are many large-cap tech stocks whose prices have gone up more than their FCF. This has caused the FCF yields to drop.
The VictoryShares Free Cash Flow ETF (VFLO) seeks to invest in profitable U.S. large-cap companies with high FCF yields. As of November 30, information technology stocks comprised 9.28% of the Russell 1000 Value Index[1]. By comparison, they made up 11.62% of VFLO’s Index[2].
VFLO’s index applies a profitability screen. It then selects companies with the highest FCF yields that exhibit relatively higher growth potential based on trailing and forward-looking metrics.
For more news, information, and analysis, visit the Free Cash Flow Channel.
VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is 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.
[1] https://advisor.vcm.com/products/victoryshares-etfs/victoryshares-etfs-list/victoryshares-free-cash-flow-etf
[2] The Victory U.S. Large Cap Free Cash Flow Index.
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The Russell 1000® Value Index is a market-capitalization-weighted index that measures the performance of Russell1000® Index companies with lower price-to-book ratios and lower forecasted growth rates.
Free cash flow (FCF) is the cash remaining after a company has paid its expenses, taxes, interest, and long-term investments.
“FAANG” is an acronym that refers to the stocks of five prominent American technology companies: Meta (META) (formerly known as Facebook), Amazon (AMZN), Apple (AAPL), Netflix (NFLX); and Alphabet (GOOG) (formerly known as Google).
The “Magnificent Seven” is a term that describes the seven biggest technology-focused companies that have led the market’s returns in recent years.
Book value is a company’s equity value as reported in its financial statements. The book value figure is typically viewed in relation to the company’s stock value (market capitalization) and is determined by taking the total value of a company’s assets and subtracting any of the liabilities the company still owes.
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. The securities highlighted, if any, were not intended as individual investment advice.
For the VictoryShares Free Cash Flow ETF’s current holdings click here.
Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.
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How the Technology Sector Can Generate High Free Cash Flow Yields - ETF Trends
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