Pacer ETFs launches fund targeting US firms with high free cash flow

Dec 19th, 2016 | By | Category: Equities

Pacer ETFs has launched a new exchange-traded fund capturing the return offered by the highest free cash flow producing companies in the US. The Pacer US Cash Cows 100 ETF (Bats: COWZ) uses an objective, rules‐based methodology to provide exposure to the 100  companies in the large‐cap Russell 1000 Index with the highest free cash flow yield.

Pacer ETFs launches fund targeting US firms with high free cash flow

Free cash flow may be a better gauge of a firm’s underlying fundamentals as the metric is less prone to management’s reporting bias compared to sales, earnings, assets, or liabilities.

The fund tracks the Pacer US Cash Cows 100 Index which screens companies within the Russell 1000 Index are ranked by their trailing twelve month free cash flow yield (free cash flow/enterprise value) with the highest 100 companies forming the final index. As of 8 December 2016 the index’s free cash flow yield is 8.7%.

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 which 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.

Sean O’Hara, President of Pacer ETF Distributors, commented: “The Pacer US Cash Cows strategy captures an innovative and relatively untapped segment of the market by focusing on US companies with a high free cash flow yield and we’re incredibly excited to make it available to individual investors and advisors. High quality, high free‐cash‐flow yielding companies are an important part of a well‐ balanced portfolio because of their ability to sustain and grow income while also providing an opportunity for capital appreciation over time.”

Ron Bundy, CEO of North America benchmarks for global index provider FTSE Russell added: “Using a free cash flow screen to provide exposure to the top 100 companies in the Russell 1000 allows investors to track high quality US large cap companies with the potential for long term capital appreciation.  We are happy to expand our relationship with Pacer and add the Pacer US Cash Cows 100 Index to the group of indexes we support for Pacer.”

The weighted average market cap of constituents in the ETF is $46.7bn and the fund’s largest sector exposures are to information technology (24.9%), industrials (20.5%), consumer discretionary (18.8%), healthcare (11.7%) and real estate (7.0%).

The ETF’s total expense ratio (TER) is 0.49%.

Laura Morrison, Senior Vice President, Global Head of Exchange‐Traded Products at Bats, said: “Pacer ETFs continues to launch funds that invigorate the market with a fresh and intelligent perspective. The COWZ ETF launches at a time when investor focus on high quality companies is particularly sharp and I am proud Pacer has chosen the Bats ETF Marketplace as its listing venue.”

Pacer has announced plans to roll out further ETFs utilizing the same strategy with a focus on free cash flow. Future launches are planned to focus on developed international or emerging markets equities, thus providing investors with a full scope for global ‘cash cow’ exposure. The Pacer Developed Markets International Cash Cows 100 ETF (ICOW) and the Pacer Emerging Markets Cash Cows 100 ETF (ECOW) are still in registration.

The fund will compete with the $13m TrimTabs Float Shrink ETF (Bats: TTAC) which came to market in September of this year.  TTAC is primarily focused on generating returns that exceed those of the Russell 3000 Index, a proxy for the total US stock market. Its strategy is to select approximately 100 companies that are both generating free cash flow and reducing their share count without the use of leverage. It has a TER of 0.59%.

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