Victory Capital adds small-cap ETF to free cash flow suite

Jan 2nd, 2024 | By | Category: Equities

Victory Capital Management has expanded its line-up of equity smart beta ETFs capturing both quality and growth investment factors with a new fund focused on US small-cap stocks.

Mannik Dhillon, President of VictoryShares

Mannik Dhillon, President, Investment Franchises and Solutions, Victory Capital.

The VictoryShares Small Cap Free Cash Flow ETF (SFLO US) has been listed on Nasdaq with an expense ratio of 0.49%.

The fund is linked to the Victory US Small Cap Free Cash Flow Index which selects its constituents from a universe of the 2,500 next-largest US-listed securities outside of the 1,000 largest stocks. The initial universe excludes financial companies and real estate investment trusts as well as any firm with negative earnings or a negative free cash flow yield.

The methodology first screens for the 300 companies with the highest free cash flow yield – free cash flow is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. It represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. The metric is important because it shows the amount of funds that a company possesses to pursue opportunities that enhance shareholder value.

By focusing on free cash flow, the methodology may be better able to scrutinize the underlying corporate fundamentals of each company. Indeed, management tends to have less discretion on how free cash flow is reported, compared to other metrics such as sales, earnings, assets, or liabilities which can, in some cases, be massaged.

From the reduced pool of 300 securities, the index selects the 200 stocks with the highest growth trend of sales and earnings.

Constituents are weighted using a combination of a company’s total free cash flow and its free cash flow yield. Individual stocks are capped at 4% and any single sector is limited to a maximum weight of 45% or 20% above its weight in the parent universe.

Victory Capital offers a second ETF in its free cash flow suite which invests in US large-cap stocks – the VictoryShares Free Cash Flow ETF (VFLO US) houses $120 million in assets and has an expense ratio of 0.39%.

Mannik Dhillon, President, Investment Franchises and Solutions, Victory Capital, commented: “We are excited to expand our free cash flow line-up with the introduction of SFLO. Investors will now be able to capitalize on companies with attractive free cash flow yields without sacrificing growth potential in the small-cap allocation of their portfolios.”

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