Pacer ETFs has launched the Pacer US Export Leaders ETF (PEXL US) on NYSE Arca, providing smart beta exposure to high-growth US companies with strong export-oriented revenue streams.
The fund provides exposure to 100 US large- or mid-cap firms with high export-based revenue and strong free cash flow growth.
The fund tracks an in-house index – the Pacer US Export Leaders Index – based on 100 of the biggest US exporting companies with the strongest growth in free-cash flow.
To select the constituents, the index first identifies the top 200 companies in the S&P 900 (excluding financials) that have the highest annual foreign sales as a percentage of total sales.
The S&P 900 is an amalgamation of the S&P 500 and S&P MidCap 400 indices.
It then narrows the selection pool down to the 100 companies with the highest change in free cash flow growth over the past five years.
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 M&A. 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.
All companies in the index are equally weighted as of the quarterly reconstitution with rebalances in March, June, September, and December.
“These are US companies that are able to expand their reach beyond domestic markets while maintaining substantial free cash flow growth,” said Sean O’Hara, president of Pacer ETF Distributors. “PEXL offers the opportunity to invest in these high quality, US-based large-cap and mid-cap companies that have proven themselves to have higher earnings growth and revenue growth than their domestic only counterparts.
“Smaller companies that don’t trade around the world have limited growth potential. Bigger firms that have connected with consumers around the world can be a great fit for an investment portfolio,” O’Hara added.
As of the end of June 2018, the index had a ‘foreign sales’ proportion of 66.7% and an annualised five-year free cash flow growth rate of 17.7%.
Using back-tested data, the index has shown an annualized returned of 14.4% over the past five years. This compares to the Russell 1000, which returned 13.4% per annum over the same period.
Source: S&P Dow Jones Indices.
While tough talk of foreign trade between the US and the world has recently dominated headlines, Joe Thomson, founder and president of Pacer Financial, believes investors should focus on a long-term horizon.
“We may see better conditions for US exporters come out of these frank trade discussions,” said Thomson. “But no matter what, global trade will continue to march forward. Companies that do a great job selling their goods and services overseas, and in particular those with a proven history of free cash flow growth, can be a great choice for investors.”
The fund comes with an expense ratio of 0.60%.
Free cash flow also forms the basis for Pacer’s ‘Cash Cows’ series of ETFs. The four funds, which include global, developed international, US large-cap, and US small-cap exposures, select stocks using a free cash flow yield filter which tilts the portfolios towards value and quality factors.
The Pacer Global Cash Cows Dividend ETF (GCOW US) and Pacer US Cash Cows 100 ETF (COWZ US) are the two largest funds in the suite with approximately $190 million and $90m in assets under management respectively. GCOW and COWZ come with expense ratios of 0.60% and 0.49%.