For years, the search for high-quality, cash-generating businesses has been a predominantly American story. But that is changing, and for advisors building portfolios in an era of historically concentrated domestic markets, the shift carries real implications.

Michael Mack, Client Portfolio Manager for VictoryShares and Solutions, made the case at Exchange in a conversation with VettaFi: international companies are rapidly closing the free cash flow (FCF) generation gap with their U.S. counterparts, with a new generation of ETFs built to capture that opportunity with discipline.

What Is Free Cash Flow and Why Does It Matter for International Investing?

FCF is the cash a company generates after accounting for capital expenditures — the money left over to reinvest, pay dividends, reduce debt, or return to shareholders. It is widely regarded as one of the most reliable indicators of a company’s underlying financial health, because unlike earnings, it is difficult to manufacture through accounting adjustments.

Historically, international equity allocations have been dominated by traditional value names or speculative small caps, categories that often sacrifice quality for cheapness or growth potential. An FCF-based framework offers a third path: mispriced quality, identifying financially strong businesses trading at valuations that have become increasingly rare in the U.S. large-cap space.

IFLO and GRIN Offer Two Distinct Paths to International Free Cash Flow

For many advisors, international sleeves tend to be overweight in traditional value names or speculative small caps. Mack argued that an FCF-tilted approach delivers exposure to higher-quality companies, complementing standard allocations and providing a more balanced risk-return profile.

The VictoryShares International Free Cash Flow ETF (IFLO) tracks an index built to identify high-quality international firms, offering what Mack describes as a quality at a discount opportunity that standard international allocations often miss.

Mack also highlighted the VictoryShares International Free Cash Flow Growth ETF (GRIN) as a vehicle for capturing what he described as the AI build-out through international industrials and defense. These are sectors where such valuations and high growth rates are now increasingly difficult to find in the U.S. mega-cap space. The companies that GRIN’s index seeks to capture offer the rare combination of quality and growth that has become a defining challenge for domestic equity investors.

An FCF-based framework helps advisors identify hidden value and avoid unnecessary risk. By prioritizing companies with the financial strength to reinvest or weather downturns, advisors can pursue long-term investment objectives without relying on speculative bets.

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

VettaFi LLC (“VettaFi”) is the index provider for GRIN and IFLO, for which it receives an index licensing fee. However, GRIN and IFLO are 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 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 vcm.com/prospectus. Read it carefully before investing.

All investing involves risk, including the potential loss of principal. The market prices of securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, or changes in interest or currency rates. 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. 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. Investments concentrated in a single country, a small number of countries or a specific region may be particularly affected by adverse markets, rates, and events, which may occur in those countries and regions and typically exhibit higher volatility. Both Funds are new with a limited operating history. As a result, they do not have a record of performance or other dealings for prospective investors to evaluate when making investment decisions.  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. Index Funds invest in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Fund may diverge from that of the Index. Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Fund’s shares. The actions of large shareholders, including large inflows or outflows of cash, may adversely affect other shareholders, including potentially increasing capital gains. Derivatives may not work as intended and may result in losses. 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. Diversification does not assure a profit or protect against loss.

The Victory International Free Cash Flow Growth Index measures the performance of profitable companies in the developed world, excluding the United States, that generate high free cash flow yield and higher growth characteristics. The indices are subject to sector country and individual security weight constraints. Constituents are weighted by free cash flow modified absolute momentum.

The Victory International Free Cash Flow Index measures the performance of profitable companies in the developed world, excluding the United States, that generate high free cash flow from invested capital and display higher growth characteristics. The indices are subject to sector country and security weight constraints. The constituents are weighted by modified free cash flow yield.

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

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