Beyond Value: Applying Free Cash Flow to Growth & Small-Caps

Free cash flow (FCF) can serve as an effective metric to screen for large-cap value through ETFs such as the VictoryShares Free Cash Flow ETF (VFLO B+). However, investors are increasingly recognizing that cash generation is an essential filter across the entire style box.A recent TMX VettaFi webcast featured Victory Capital’s Lance Humphrey, head of portfolio management at VictoryShares and Solutions and Thomas Allman, associate portfolio manager at VictoryShares and Solutions. They discussed how expanding a disciplined FCF framework into growth with the VictoryShares Free Cash Flow Growth ETF (GFLW ) and small-caps with the VictoryShares Small Cap Free Cash Flow ETF (SFLO ) can solve critical portfolio vulnerabilities.Key Takeaways: Expanding a disciplined free cash flow framework beyond large-cap value addresses key structural vulnerabilities, across both growth equities and small-cap benchmarks. In large-cap growth, GFLW screens for high free cash flow return on invested capital (FCF ROIC) to capture business expansion, while mitigating the cash flow erosion and concentration risks tied to heavy AI infrastructure spending. In small-caps, SFLO eliminates unprofitable index constituents by requiring positive free cash flow and strong forward growth, across a disciplined 200-stock portfolio trading at an attractive valuation discount. See More: GFLW: Growth Is Alive & Well With This Free Cash Flow ETFTargeting High-Growth OpportunitiesWebcast polling underscored the style box challenges for investors looking beyond large-cap value. In the growth arena, 36% of polled attendees identified heavy artificial intelligence (AI) spending and its FCF erosion as their primary concern.Traditional growth benchmarks evaluate revenue and earnings expansion without accounting for capital efficiency. As noted in the webinar, this can penalize investors with increased volatility. As technology hyperscalers accelerate capital expenditures (CapEx) to build AI infrastructure, cash flow compression has become a central risk. Allman emphasized this during the webcast, noting that “when a company is trying to build out their AI infrastructure, they’ve got large CapEx that comes out of free cash flow.” GFLW resolves this by focusing security selection on free cash flow return on invested capital (FCF ROIC), which measures how efficiently a company translates invested capital into real cash. By averaging trailing and forward-looking 12-month cash flows divided by invested capital, the strategy screens the large-cap universe for growth leaders. By capping positions at 4% across 100 holdings and weighting by FCF size and momentum, GFLW avoids megacap crowding while delivering a targeted blend of profitability, expansion, and momentum.Eliminating Unprofitable Small-CapsIn small-cap investing, 42% of index constituents in traditional benchmarks like the Russell 2000 are not generating a profit. In fact, 30% of polled advisors highlighted that too many unprofitable companies is the single largest barrier to small-cap allocation. This was followed by years of underperformance (25%) and interest rate sensitivity (19%). In an environment marked by elevated interest rates and refinancing costs, debt-laden and unprofitable companies face severe margin contraction.SFLO addresses this by requiring every constituent to be profitable and generate positive FCF at each quarterly rebalance. Starting from a broad universe, SFLO selects 300 names based on valuation before eliminating the slowest growers to establish a diversified 200-stock portfolio. Humphrey noted that SFLO’s portfolio trades at roughly 10 times forward earnings, with a FCF yield near 10%, offering an exceptional entry point for valuation-conscious investors. “For valuation conscious investors, there’s no better opportunity than what we see in small-caps,” Humphrey emphasized. Overall, the webcast demonstrated that cash conversion remains the most reliable metric to gauge business health. Whether deployed alongside VFLO or as standalone growth and small-cap solutions, both GFLW and SFLO provide rules-based discipline built for changing market cycles. For more news, information, and analysis, visit the Equity ETF Content Hub. VettaFi LLC (“VettaFi”) is the index provider for VFLO, GFLW, and SFLO for which it receives an index licensing fee. However, VFLO, GFLW, and SFLO 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 VFLO, GFLW, and SFLO.