While every investor loves to search for the next home run, sometimes it’s the most tried and true, common sense strategies that are the most effective. That’s why I’ve been relatively impressed by some of the new ETF offerings being made by Pacer ETFs.
Within the past year or so, the company has launched two new products that focus not on a narrow niche market but a fundamental strategy that targets companies with strong balance sheets and big cash flows.
I’ve praised the Pacer US Cash Cows 100 ETF (COWZ) in the past but I think the Pacer Global Cash Cows Dividend ETF (GCOW) deserves similar acclaim. I consider free cash flow one of the best measures of financial health since it tells us how much money is left over after a company pays all the bills and reinvests back into the business. Significant free cash flow gives companies a great deal of flexibility. It allows them to pursue new growth opportunities, pay down debt and, perhaps more importantly from an investor perspective, increase shareholder payouts such as dividends and share buybacks.
The fund uses the FTSE Developed Large Cap Index as its foundation. It’s an index of 1000 large companies from developed nations worldwide. From that universe, it identifies the 300 components with the highest trailing 12 month free cash flow yields. Of those 300, the fund picks out the 100 stocks with the highest trailing 12 month dividend yields. The result is a portfolio filled with companies that have strong balance sheets, lots of cash, above average dividend yields and, in many cases, trade at multiples lower than the S&P 500.
Ascertaining the current yield on the fund is somewhat challenging given how new it is but it looks to be much above the S&P 500’s yield. The fund’s fact sheet quotes a dividend yield of over 4% but the trailing yield appears a bit less. Using the three quarterly dividends distributed thus far produces an annualized yield of around 2.5%. The most recent quarter’s dividend would imply a 3.3% yield. There’s little point in arguing which number is the most correct given the relatively limited history of the fund but all signs point to the fund paying a higher dividend than the broader indices.
The performance of companies with high free cash flow yields has been well-documented. One study found that the top quintile of companies with the highest free cash flow yields significantly outperformed the other 80% of companies with lower FCF yields. Moreover, these results were consistent across companies of all sizes. Small caps, mid caps and large caps with the highest free cash flow yields all outperformed their respective groups with mid caps delivering particularly outsized returns.
The Global Cash Cows Dividend ETF is roughly one-third invested in the United States currently with the United Kingdom, Switzerland and France also receiving larger allocations. The fund is well-diversified across a number of industries with telecom, healthcare, consumer staples, consumer discretionary and tech stocks all accounting for at least 10% of the portfolio. One notable exclusion is financials. Real estate is in the fund but the broader financial sector is excluded from the index. The fund’s forward P/E ratio of 17 is slightly less than the 18 multiple of the S&P 500. The fund is still relatively young with only about $54 million in assets but the strategy underlying it has proven to be a winner. It currently trades about 20,000 shares daily so it may be somewhat operationally inefficient and have higher than average trading costs. Once the fund gets a little bigger and that hurdle is cleared, I like this fund as a potential core holding in many portfolios.
With so many companies producing increasing niche ETF products, it’s nice to see some companies still focusing on solid, long-term fundamental strategies.
The Pacer Global Cash Cows Dividend ETF (BATS:GCOW) was trading at $28.14 per share on Tuesday afternoon, down $0.13 (-0.46%). Year-to-date, GCOW has gained 4.80%, versus a 6.22% rise in the benchmark S&P 500 index during the same period.
David Dierking is a freelance writer focusing primarily on ETFs, mutual funds, dividend income strategies and retirement planning. He has spent more than 20 years in the financial services industry and his background includes experience in investment management, portfolio analytics and asset/liability management at both BMO Financial Group and Strong Capital Management.
He has written for Seeking Alpha, Motley Fool, ETF Trends and Investopedia and was also included in the panel for ETFReference.com’s “101 ETF Investing Tips from the Experts”. He has a B.A. in Finance from Michigan State University and lives in Wisconsin with his wife and two daughters.