Global X Launches Free Cash Flow ETF

Global X Funds, which manages $41.6 billion in 107 exchange-traded funds, this week launched its first free cash flow fund with the aim of investing in companies that may be in good shape to boost dividends and invest in new projects. 

The Global X U.S. Cash Flow Kings 100 ETF (FLOW) follows an index that tracks large and midcap U.S. stocks that have higher-than-average free cash flow yields. The fund has $2.6 million in assets and gained 1.8% today.  

Free cash flow measures the money a company has left over after paying costs like salaries, rent and taxes, and may indicate its ability to make future investments. The company said investing in firms with solid results in this area may be appealing, as interest rates remain high, since the measurement offers a window on a company’s health. The fund’s top holding is U.S. steelmaker Nucor Corp. 

Free Cash Flow ETFs 

“Free cash flow has become a more popular metric because, in short, it is difficult to manipulate,” Rohan Reddy, director of research at Global X, told etf.com.  

While FLOW is not the first ETF to focus on this metric, it’s cheaper than competitors, with a 0.25% expense ratio compared to 0.49% for the Pacer U.S. Cash Cows 100 ETF (COWZ) and 0.39% for the VictoryShares Free Cash Flow ETF (VFLO). The fund is aimed at being a core U.S. stock holding with a slightly conservative lean in terms of risk, especially as it has a 25% cap for each sector and a 2% cap for each holding to focus on diversification.  

The major difference between cash flow and net income is that the latter includes noncash expenses. An example of noncash expense is depreciation of equipment. As machinery a company owns wears out, it loses value and needs to be replaced sooner, so the company is losing resale value and will eventually have to pay to replace it. This is included in a standard income statement as an expense, even though the business hasn’t actually laid out dollars.  

Contact Gabe Alpert at [email protected]