Pacer launches US small-cap ‘Cash Cows’ ETF with momentum tilt

May 9th, 2023 | By | Category: Equities

Pacer ETFs has added a new US small-cap equity ETF to its ‘Cash Cows’ product line-up.

Pacer launches momentum-tilted US small-cap ‘Cash Cows’ ETF

The fund tilts towards stocks with high share price momentum.

The Pacer US Small Cap Cash Cows Growth Leaders ETF (CAFG US) has been listed on Nasdaq with an expense ratio of 0.59%.

Pacer’s Cash Cow ETFs are smart beta funds that generally select and weight their constituent stocks based on a free cash flow yield filter, a methodology that aims to target financially robust companies, thereby tilting portfolios towards the quality factor.

Free cash flow is the cash remaining after a company has paid expenses, interest, taxes, and long-term investments. It can be used to buy back stock, pay dividends, or participate in mergers and acquisitions. The ability to generate a high free cash flow yield indicates a company is producing more cash than it needs to run the business and can invest in growth opportunities.

Pacer’s Cash Cow line-up now consists of nine ETFs with the other funds delivering US large-cap, US growth, global, developed ex-US, and emerging market exposures. The suite also includes another US small-cap fund as well as a diversified fund that allocates across the other ETFs in the series.

Methodology

The new ETF is linked to the proprietary Pacer US Small Cap Cash Cows Growth Leaders Index which is constructed from the S&P Small-Cap 600 universe.

The methodology selects the 100 securities with the highest free cash flow margins over the past 12-month period.

While most of the existing Pacer Cash Cow ETFs weight their constituents by free cash flow yield, including the $2bn Pacer US Small Cap Cash Cows 100 ETF (CALF US) which also has an expense ratio of 0.59%, CAFG weights its holdings according to 12-month share price momentum. Any individual stock is capped at 5%.

According to Pacer, while the P/E ratio of the index is virtually identical to the S&P Small-Cap 600, its free cash flow margin is notably higher at 19.94% (compared to 4.57%) highlighting the strategy’s lean towards the quality factor.

The index is notably tilted towards stocks from the information technology (31.2%), health care (18.5%), and consumer discretionary (14.2%) sectors with the next-largest sector exposures being industrials (9.8%) and consumer staples (8.9%).

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