about 1 year ago • 1 min
As the recession drums beat louder, higher quality companies become more attractive. One of the best ways to assess the quality of a company is by its free cash flow yield (free cash flow per share divided by the share price). Having more cash flow gives companies additional flexibility for dealing with any unforeseen business circumstances, paying off debt, returning dividends to shareholders, buying back their own stock, investing in future growth, or buying other companies. It also better equips them to outlast a recession due to their ample cash reserves. This is grounded in finance academic theory as well as empirical research.
And it’s the idea behind the Pacer US Cash Cows 100 ETF (ticker: COWZ; expense ratio: 0.49%). The ETF (dark blue line), which screens the Russell 1000 index (light blue line) for the 100 large- and mid-cap stocks with the highest free cash flow yield, has beaten the Russell 1000 by 6.9 percentage points per year since 1991, indicating that it holds up well over many different stock market and economic cycles. Since 1991, it has delivered a return of over 11,000%, compared to the Russell 1000’s almost 2,000%. And so far this year is down only about 2.5%, compared to the 21.36% that the Russell 1000 is down. It’s helped by that steady cash flow yield, and by its significant exposure to energy (at 23% overweight) and its lack of exposure to tech (at 16.5% underweight). But the ETF also adjusts its weights dynamically: back in 2017 when tech was the place to be, it was 14% overweight on the sector’s stocks.
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