With the S&P 500 posting multiple record highs this year, many investors are questioning whether valuations have peaked—and whether now is the right time to commit new capital. That uncertainty can lead to hesitation or even sitting on the sidelines. In environments like this, applying an objective metric such as free cash flow (FCF) can help cut through the noise. The VictoryShares team views strong FCF as a marker of high-quality businesses that may be better positioned in elevated-valuation markets.

To explore this idea further, Victory Capital client portfolio manager Michael Mack joined TMX VettaFi’s head of research, Todd Rosenbluth, to outline how FCF fits into today’s market backdrop. Their conversation highlighted Victory Capital’s suite of ETFs dedicated to FCF, beginning with the flagship VictoryShares Free Cash Flow ETF (VFLO), which tracks the Victory U.S. Large Cap Free Cash Flow Index (the VFLO Index). The index targets high-quality, large-cap companies trading at attractive valuations with solid growth prospects.

“One of the biggest challenges in today’s market is valuation risks,” said Mack. He noted that current valuation levels today present a disconnect in stock prices relative to their fundamental metrics. “We think investors need to try to solve for that problem by reducing their valuation risks — buying stocks with high free cash flow.”

Using FCF in Growth

The FCF metric can also be applicable to the growth factor. As Mack noted, research shows that growth may have the potential to work best when used in combination with FCF. As such, there’s the VictoryShares Free Cash Flow Growth ETF (GFLW), which tracks the Victory Free Cash Flow Growth Index (the GFLW Index). The ETF can provide exposure to U.S. companies that exhibit high FCF profitability as well as the potential to compound FCF generation over time.

“If you look at growth as an investment factor, the last 25 years as a stand-alone factor, it hasn’t been effective,” Mack said. “It’s only when you combine it with profitability that growth has become effective. What we’re focusing on is free cash flow profitability or free cash flow return on invested capital.”

“The higher that they’re able to generate free cash flow, the more (likely) they’ll be able to grow their businesses,” he added.

Can FCF Work Internationally?

Additionally, on the foreign side of the style box, investors may have some new ETFs to keep a close watch on. With the weakness in the dollar and other macroeconomic factors, investors have been gravitating toward international equities after initially avoiding them at the start of the year. Victory Capital recently launched a pair of ETFs in which a FCF screener is be applied — the VictoryShares International Free Cash Flow ETF (IFLO) and the VictoryShares International Free Cash Flow Growth ETF (GRIN).

“It’s less about avoiding the U.S. and more about expanding your opportunity set — looking internationally at opportunities through the lens of high-quality, high free cash flow companies,” Mack said. “And so we’ve rolled these ETFs out to allow investors to expand their access to high free cash flow companies across the market.”

The Adaptability of FCF

The VictoryShares suite of FCF ETFs demonstrates that the FCF metric can be applied in a wide range of scenarios. With this framework in mind, investors can build a diversified portfolio using these funds, including a small-cap complement through the VictoryShares Small Cap Free Cash Flow ETF (SFLO).

“One of the things our research has found which underscores the appeal of free cash flow is it’s worked across different regions and asset classes,” Mack said. “And so the goal is to build a diversified portfolio based on free cash flow.”

Watch the full interview below:

For more news, information, and analysis, visit the Free Cash Flow Content Hub.

VettaFi LLC (“VettaFi”) is the index provider for VFLO, SFLO, GFLW, GRIN and IFLO, for which it receives an index licensing fee. However, VFLO, SFLO, GFLW, GRIN and IFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO, SFLO, GFLW, GRIN and IFLO.

Disclosure Information

Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit http://www.vcm.com/prospectus. Read it carefully before investing.

All investing involves risk, including the potential loss of principal. The Funds have the same risks as the underlying securities traded on the exchange throughout the day. ETFs may trade at a premium or discount to their net asset value. The Funds are new with a limited operating history. As a result, the funds do not have a record of performance or other dealings for prospective investors to evaluate when making investment decisions.  Index Funds invest in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Funds may diverge from that of their respective Indexes. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions.

The funds could also be affected by company-specific factors that could jeopardize the generation of free cash flow. International investments can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic developments and can perform differently from U.S. investments.  Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Funds’ shares. The actions of large shareholders, including large inflows or outflows of cash, may adversely affect other shareholders, including potentially increasing capital gains. The value of your investment is also subject to geopolitical risks such as wars, terrorism, trade disputes, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies. 

The Victory U.S. Large Cap Free Cash Flow Index aims to select high quality companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly. This Index calculates free cash flow yield by dividing expected free cash flow by enterprise value. Expected free cash flow is the average of trailing 12-month FCF and next 12-month forward free cash flow. Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization.

The Victory Free Cash Flow Growth Index measures the performance of profitable companies that generate high free cash flow from invested capital and display higher growth characteristics. The indices are subject to sector and security weight constraints. The constituents are weighted by modified absolute momentum.

You cannot invest directly in an index.

VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.

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