Positioning Defensively Within Equities

According to Pierre-Olivier Gourinchas, economic counselor and director of research at the International Monetary Fund, strong job growth, productivity, and demand continue to drive “overheated” economic performance in the U.S.

“The fiscal stance, out of line with long-term fiscal sustainability, is of particular concern,” Gourinchas cautioned. “It raises short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy.”

Strong first-quarter equity performance attracted billions in flows into benchmark equity funds. So far in the second quarter, a pervasive sense of FOMO permeates equity markets while inflation, interest rates, and geopolitical risks grow. Advisors and investors must now weigh equity return potential alongside heightened risk.

Invest in Defensive Equities While Capturing Growth

Advisors and investors looking to retain equity exposures but add a defensive tilt should do well to consider the two recently launched free cash flow ETFs from VictoryShares.

Free cash flow (FCF) offers investors exposure to stable companies. Free cash flow is the remaining cash a company has after covering all expenses. It can be used to invest in growing the business, pay dividends or pay down debt. A company with a healthy FCF can meet its debt obligations, which is important in a high-rate environment, as well as pay its shareholders.

The VictoryShares Free Cash Flow ETF (VFLO) and the VictoryShares Small Cap Free Cash Flow ETF (SFLO) offer exposure to quality companies with a growth focus. The indexes calculate FCF holistically. The approach includes both trailing and anticipated FCF. When screening companies, the underlying indexes use a rules-based methodology to account for overall FCF and FCF yield.

VFLO provides exposure to companies with favorable forward-looking FCF estimates. It also employs a growth screen for securities included, giving VFLO and SFLO a forward-looking, growth-oriented approach to FCF investing.

In uncertain times, these funds offer defensive positioning while still capturing growth potential. VFLO has a net expense ratio of 0.39%, and SFLO has a net expense ratio of 0.49% (VFLO gross expense ratio 0.66%; SFLO gross expense ratio 0.76%).

VettaFi LLC (“VettaFi”) is the index provider for VFLO and SFLO, for which it receives an index licensing fee. However, VFLO 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 and SFLO.

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

Free cash flow (FCF) is a company’s net cash flow from operations minus capital expenditures.

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. Please note that the funds are new ETFs with a limited history. As a result, prospective investors do not have a track record or history on which to base their investment decisions. In addition, to facilitate commencement and/or growth of the Funds, seed investors, such as the Funds’ Adviser or one of its affiliates, a lead market maker, Authorized Participant, or other entity may contribute all or most of the assets in the Funds.

If a seed investor redeems its shares, it could negatively impact the Funds’ NAV, market price and brokerage costs. The Funds have the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited, and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value. The 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 fund could also be affected by company-specific factors that could jeopardize the generation of free cash flow. Investments concentrated in an industry or group of industries may face more risks and exhibit higher volatility than investments that are more broadly diversified over industries or sectors. Derivatives may not work as intended and may result in losses.

Additional Information

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, may adversely affect other shareholders, including potentially increasing capital gains. Investments in mid-cap companies typically exhibit higher volatility. The value of your investment is also subject to geopolitical risks such as wars, terrorism, 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. Investments in smaller companies typically exhibit higher volatility. SFLO is also subject to the risk that investments in smaller companies typically exhibit higher volatility.

The Victory U.S. Small 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 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.

Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.

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