The Critical Role of Free Cash Flow in Today’s Market

Core Insights - The S&P 500 Index is reaching new highs, prompting advisors to seek ways to maintain equity exposure while managing valuation risks. Free cash flow (FCF) is highlighted as a crucial tool for identifying high-quality investment opportunities in the current market [1][2]. Group 1: Importance of Free Cash Flow - Free cash flow is essential for cutting through market noise characterized by high valuations and concentration in mega-cap stocks, particularly in the context of rising AI-related capital expenditures [2][5]. - Companies with strong and sustainable cash generation are positioned for long-term growth, enhancing portfolio resiliency [2]. - Historical trends show that growth and value investing come in cycles, with current allocations being 23% towards growth and 15% towards value [3]. Group 2: FCF Mechanics and Evaluation - The evaluation of FCF involves analyzing a company's cash flow relative to its enterprise value, aiming to identify companies with attractive valuations based on profitability [8][16]. - Key metrics include FCF yield and return on invested capital (ROIC), which provide a comprehensive measure of profitability [8]. Group 3: FCF ETF Strategies - Victory Capital offers several ETFs focused on FCF, including: - VictoryShares Free Cash Flow Growth ETF (GFLW), which targets U.S. companies with high FCF profitability [9]. - VictoryShares Free Cash Flow ETF (VFLO), focusing on large-cap U.S. stocks with favorable growth prospects [9]. - VictoryShares Small Cap Free Cash Flow ETF (SFLO), investing in profitable small-cap companies with high FCF yields [9]. - International options include VictoryShares International Free Cash Flow ETF (IFLO) and VictoryShares International Free Cash Flow Growth ETF (GRIN) [10]. Group 4: FCF Flexibility and Market Resilience - A FCF strategy is beneficial during economic slowdowns, as companies with substantial cash reserves can better withstand market downturns [11]. - The emphasis on diversifying portfolios with a focus on free cash flow is recommended for navigating various market conditions [12].