US-based Pacer ETFs has added two funds to its ‘Cash Cow’ smart beta line up, targeting equities from the international developed and US small cap universes. The new funds select stocks using a free cash flow yield filter which tilts the portfolios towards value and quality factors.
Pacer now has four ‘Cash Cow’ ETFs that focus on US large caps, high dividend US large caps, US small caps and global developed markets ex-US.
The new ETFs are the Pacer Developed Markets International Cash Cows 100 ETF (BATS: ICOW) and the Pacer US Small Cap Cash Cows 100 ETF (BATS: CALF). ICOW selects the 100 stocks with the highest free cash flow yield from the FTSE Developed ex-US Index. These constituents are then weighted according to 12 month trailing free cash flow yield with a 2% cap for individual securities. CALF uses the same methodology to select and weight stocks from the S&P Small Cap 600 Index.
The methodology aims to give exposure to high quality stocks that are trading at a discount. 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.
ICOW has a free cash flow yield of 7.2% and a price-earnings ratio of 12.4, compared to 3.7% and 18.6 for its underlying index, indicating the tilt of the fund to value and quality characteristics. Similarly, CALF has a free cash flow yield of 9.7% and a price-earnings ratio of 18.4, compared to 3.5% and 24.2 for its underlying index.
Significant country exposures in ICOW include Japan (36%), Korea (15%) and the UK (13%) and significant sector exposures include consumer discretionary (27%), materials (19%) and industrials (17%).
Significant sector exposures in CALF include consumer discretionary (38%), information technology (21%) and industrials (18%).
The total expense ratios (TERs) of the funds are 0.65% and 0.59% for ICOW and CALF respectively.
The new funds join the Pacer US Cash Cows 100 ETF (BATS: COWZ) (AUM $10m) and the Pacer Cash Cows Dividend ETF (BATS: GCOW) (AUM $87m) which were launched in 2016.
Sean O’Hara, president of Pacer ETF Distributors, commented: “At Pacer ETFs, we believe free cash flow yield is the best metric to measure quality. Our research shows companies with high free cash flow yield tend to outperform the broader market over time because they are more likely to have healthy balance sheets and growth potential. Having the cash flow story resonate well with Pacer Global Cash Cows Dividend ETF (GCOW) and Pacer US Cash Cows 100 ETF (COWZ), we are adding the ETFs to create more options for advisors looking for quality investment strategies. ”