On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research, Todd Rosenbluth, discussed the VictoryShares Free Cash Flow ETF (VFLO B+) with Chuck Jaffe of Money Life. The pair discussed several topics related to the ETF, in order to give investors a deeper understanding of it. Chuck Jaffe: One fund, on point for today. The expert to talk about it. This is the ETF of the Week!
Yes, welcome to the ETF of the Week, where we examine trending, newsworthy, unique, and intriguing exchange-traded funds with Todd Rosenbluth. He’s head of research at VettaFi, and if you go to VettaFi.com, you will find a full suite of tools and research that’s going to help you become a savvier, smarter investor in ETFs.
Todd Rosenbluth, it’s great to chat with you again.
Your ETF of the Week is…
Todd Rosenbluth: The VictoryShares Free Cash Flow ETF, VFLO.
Chuck Jaffe: VFLO, the VictoryShares Free Cash Flow ETF. Now this fund, you know, in all those words that I listed — new, newsworthy — well, it’s not quite so new, because it’s about to be three years old. But that, to some extent, makes it newsworthy because, man, has it been trending and intriguing with the results it’s had in its first couple of years!
So, why VFLO now?
Todd Rosenbluth: So, a few different reasons. You’re right. It is about to turn three years old — it hits that on Monday, its three-year anniversary. It already has almost $8 billion in assets. It is crushing its peers; it’s outperformed its Morningstar category each of its calendar years, and this year as well. It’s even crushing other free cash flow ETFs like the Pacer product, (COWZ A-).
And what we’ve seen is the market has been broadening out. There’s a bit more value and fundamentals in the market environment and market sentiment. And I think VFLO is a great example of how you can get an index-based product that rebalances periodically based on fundamentals and have it work for your portfolio.
Chuck Jaffe: Is there something different that these guys are doing? I mean, COWZ, the Pacer fund that you mentioned, which has been an ETF of the Week at least twice in the long history of ETF of the Week… I’m not sure you did it with me, but I know it’s been there multiple times — a very popular ETF. But if this is doing better than that, is there something special in what they’re doing?
Todd Rosenbluth: Yes. So, what Victory does is they look at free cash flow yield, which is the free cash flow generation on a valuation standpoint relative to the enterprise value of the company. So, that’s relatively simple, and that starting point is actually what Pacer is doing.
What Victory is doing that is quite impressive to me is there’s a growth focus to it — there’s a filter. What Victory is doing through their index-based approach is looking forward and using growth to understand this. So, the portfolio is quite different for VFLO than it is for COWZ. And as a result, the performance is different. And again, I’m picking this year in particular because it’s been a strong year for VFLO. But VFLO is outperforming COWZ by roughly 1,000 basis points, I believe, thus far this year.
That’s impressive. That shows you what’s inside the portfolio matters.
Chuck Jaffe: You mentioned that it’s index-based, but this is not your classic, stayed, static index. Nobody seems to want to use the term “smart beta” anymore, which is…
Todd Rosenbluth: I’ll use it!
Chuck Jaffe: Okay! So, this is a smart beta fund. Explain what that is and why this is not your standard “just go buy an index fund and it’ll sit tight.” Even though it’s passive investing, it’s a little more than passive.
Todd Rosenbluth: You’re right. So, the S&P 500, the Russell 1000 Index, or even value versions of those well-known benchmarks are market-cap-weighted, which means the largest companies inside the index are there because they’ve grown in value. So, Apple, Nvidia, Microsoft — your Mag Seven stocks — you’d find within the S&P 500 and the Russell 1000. In fact, in the VFLO index, which VettaFi is the index provider behind, there is no exposure to the Mag Seven.
That’s not intentional; it’s just those companies don’t qualify based on their free cash flow generation characteristics. So, the Victory index rebalances on a quarterly basis. Actually, it is set to rebalance just after we are talking, so I’m going to try to not talk too much about holdings because there will be some changes. It rebalances quarterly, and what that often does is result in buying low and selling high.
If you’re doing a value approach, you want some rebalancing activity so that stocks that have run up don’t have too large a weighting within the portfolio, or they may no longer qualify. So to me, the term smart beta or factor-based investing is extremely appropriate for this VFLO product, because of how it stands out versus a cap-weighted index.
But yes, just to be quite clear, we’ve talked about active ETFs — this is an index-based product. So, the changes happen on a quarterly basis based on fundamentals, as opposed to potential changes on a daily basis.
Chuck Jaffe: Where people don’t use smart beta anymore, what they often do use is factor. But although we mentioned COWZ, it’s not like the free cash flow idea is necessarily a big factor. You know, more people are into quality or what have you, though this could be a quality factor, I suppose, or they’re into low volatility — things along those lines.
So, do you like the free cash flow metric as a factor by itself?
Todd Rosenbluth: I think of this more as a multi-factor ETF as opposed to a single one. You touched on appropriately that there are ETFs that are focused just on quality, or that are just focused on value, or that are focused just on growth.
So, the way that I think of this is the free cash flow generation is a quality characteristic. The yield part of that free cash flow yield — so an assessment of valuation — gives you some value component. The free cash flow growth characteristic gives you a bit of a lean towards growth. So, as opposed to a single-factor approach, you’re going to get more of a blend of the factors. And while some people might think a blend gives you just the market-cap-weighted S&P 500, you’re not gonna get that, or the Russell 1000.
The stocks that people will find inside the portfolio — and I’ll give one or two right now, even though they’re going to change as you and I are talking — SanDisk and Dell are the two largest positions within VFLO. Those are technology stocks, but that’s not Apple and Microsoft and Nvidia. So, you’re going to have a notable difference in terms of if you did a side-by-side comparison between VFLO and some of those market-cap-weighted approaches.
Chuck Jaffe: You mentioned yield in there, and while the focus is free cash flow and not necessarily what the dividend payouts are, this fund does have a yield. So, let’s talk about the yield and also the expense ratio, because a smart beta index is not going to necessarily be as cheap as a straight, old-fashioned, buy-and-hold, let-it-ride kind of index.
Todd Rosenbluth: Correct. So, the net expense ratio is 39 basis points. The dividend yield is 1.1%, so you get income. This is not one of the high-income ETFs that we’ve been talking about, but as I look — and I’m using the end-of-May data because that’s what Victory has on its website — you’re going to see, relative to the Russell 1000 Value Index, which I think is an appropriate reference point, much stronger earnings growth, about similar price-to-book valuation, and the return on equity is similar. And this is a portfolio that is just 50 stocks, so this has some concentration, but the assets are spread out across them. So, answering your income and cost question with some additional metrics.
Chuck Jaffe: Does this fund play nice with its peers? I mean, where does this fit in a portfolio? Obviously, it’s multi-factor. That does mean it may have some overlap with some of the other things, but even if it doesn’t have the overlap with the Mag Seven, it will still have potentially significant overlap.
Todd Rosenbluth: VFLO ETF can fit in in a number of different ways. For people who own a more traditional, market-cap-weighted index-based approach but have some concerns about the concentration in a handful of stocks, VFLO can pair very nicely. For people who have used actively managed products, this can pair nicely as well because this is going to give you a bit of a different approach than your traditional active value strategy, but with some of the same characteristics.
I’ve seen people also using this as an opportunity to pair VFLO with some other smart beta or factor ETFs, and we talked about some other Victory ones beforehand. So, (GFLW ) is the VictoryShares Free Cash Flow Growth ETF. That is the growth sibling of this. So, I have seen clients and advisors using two different strategies from Victory together to combine and get a more neutral [stance] instead of a value tilt or a growth tilt. They’re using them together, but with a more fundamental approach. So, there are a lot of different use cases for VFLO, and I think that helps explain why it is approaching $8 billion before it hits three years old.
Chuck Jaffe: It is VFLO, the VictoryShares Free Cash Flow ETF. Again, a midcap value style fund — midcap because it’s not all into the largest companies — and about to celebrate its third anniversary, which means it’s going to get a Morningstar rating. It’s going to get a Lipper rating. It’s going to wind up showing up near the top of those rating systems and ranking systems because it’s got a great track record.
And of course, it’s also the ETF of the Week from Todd Rosenbluth. Todd, great stuff. We’ll see you again next week!
Todd Rosenbluth: Thanks a lot, Chuck!
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And I’m Chuck Jaffe, and you can learn all about my hour-long weekday podcast by going to MoneyLifeShow.com or by searching for it wherever you find your favorite podcasts.
Now, if you want to get more information on your favorite ETFs, search for them at VettaFi.com, where they’ve got all the tools you need to get the details that will make you a more informed investor. They’re on X at @Vetta_Fi, and Todd Rosenbluth, their head of research, my guest, he’s there too — he’s at @ToddRosenbluth.
The ETF of the Week is here for you every Thursday. Please follow us on your favorite podcast app to make sure you don’t miss an episode. And we’ll introduce you to another great ETF again next week. Until then, happy investing, everybody!
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Note: This article was created in part through assistance from AI tools. The content has been thoroughly reviewed and edited by the author.
VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO 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.
