ETF Watch: Pacer Adds 2 'Cash Cow' Funds

New ETFs target foreign and small-cap firms with high free-cash-flow yields.

ETF.com
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Reviewed by: etf.com Staff
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Edited by: etf.com Staff

Today Pacer is rolling out two ETFs targeting companies that offer high free-cash-flow yield. The Pacer Developed Markets International Cash Cows 100 ETF (ICOW) and the Pacer US Small Cap Cash Cows 100 ETF (CALF), like the other Pacer ETFs in the Cash Cows family, track indexes derived from well-known market benchmarks.

ICOW charges an expense ratio of 0.65%, while CALF costs 0.59%. Both funds are listed on the Bats exchange, which is owned by CBOE, the parent company of ETF.com. The new funds join the $87 million Pacer Global Cash Cows Dividend ETF (GCOW) and the $10.5 million Pacer U.S. Cash Cows 100 ETF (COWZ).

“Our research would indicate that a company with high free cash flow yield is a company that, over time, will produce higher returns than companies with lower free cash flow yields. We’re big believers in free-cash-flow yield as a screen. An example today would be Amazon being able to buy Whole Foods,” said Sean O’Hara, president of Pacer Financial’s ETF division.

Cash Cows Methodology

ICOW’s index ranks the components of the FTSE All-World Developed ex US Index based on projected free cash flows and earnings for the next two fiscal years. The methodology screens out companies with negative projected earnings or free cash flows and non-REIT financial companies, as well as companies with less than $3 billion in market capitalization. From there, the index’s methodology selects the 500 companies with the highest average daily trading value and ranks them by trailing 12-month free-cash-flow yield, selecting the top 100 companies for the index.

CALF uses a similar approach, but it is derived from the S&P SmallCap 600 Index and does not have a minimum market-cap requirement.

"With these Cash Cows, what we really want to do is screen these big broad-based indexes for the names we want,” O’Hara said. “If you wouldn’t buy a stock individually, then why would you buy it as part of an ETF that tracks a broad-based index?” 

$1 Billion Milestone

Pacer’s ETF family recently crossed the $1 billion mark, an important milestone for ETF issuers. Its largest ETF is the Pacer Trendpilot 750 ETF (PTLC), with $487 million in assets under management. The fund, which launched two years ago, uses 200-day moving averages to determine whether its assets should be allocated to three-month U.S. T-bills or the equities in the Wilshire US Large-Cap index or a 50/50 mix of the two.

"We have two verticals today in our ETF company. One is the trendpilot series and the second is the Cash Cows, and we intend to continue to build out those two,” O’Hara said. With the addition of the newest Cash Cow ETFs, Pacer offers four funds in each family.

2 More Closures Announced

Another two ETF closures were announced last week.

The stand-alone Dhandho Junoon ETF (JUNE), despite having nearly $40 million in assets under management, is slated to have its last day of trading June 26.

The fund launched a little over a year ago and has a rather strange multifocus approach, investing in three buckets of stocks. Those buckets include stocks with a recent history of share buybacks, companies that are top holdings for value-oriented hedge funds and companies that have been spun off within the past seven years.

The iShares iBonds Sep 2017 Term Muni Bond ETF (IBMF), which has just over $200 million in assets and launched in 2010, will see its last day of trading on Sept. 1, as scheduled. The fund is part of iShares’ iBonds family of target maturity bond ETFs, which are designed to mature just like individual bonds. All of IBMF’s holdings mature in 2017 by the end of August.

Contact Heather Bell at [email protected].

 

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