Pacer ETFs’ CEO on Why Cash Cows ETFs Are Resonating With Investors 

Cash Cows funds have fueled the issuer’s AUM growth.

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Reviewed by: Daria Solovieva
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Edited by: Daria Solovieva

Pacer ETFs, a Pennsylvania-based exchange-traded fund provider, reached $20 billion at the start of this year compared with $10.2 billion a year ago—and it aims to keep up that pace in 2023. That increase is fueled by its main growth engine: a series of Cash Cows ETFs. 

“When we set out our business plan for this year, it was to try to get to $40 billion just sort of almost doubled, again, from where we began the year and we've gotten off to a pretty good start; the market is certainly not helping us here,” Sean O’Hara, CEO of Pacer ETFs, said on the latest episode of the Exchange Traded Fridays podcast. “But you know, we're up about $3 billion [in] AUM year to date, so there's still a possibility that we could hit our goal, if all things go according to plan.” 

When it comes to company size, O’Hara noted that growth may be slower. 

“We will continue to grow, but I think not quite as quickly as we have been growing in terms of headcount over the last two or three years,” he said. 

Pacer ETFs recruited 38 more employees last year, bringing the total to 155. 

“The vast majority of the success in the AUM growth is attributable to a couple of things. One is we have a very large distribution effort at Pacer. We have about 79 external wholesalers and four divisional managers in the field,” O’Hara explained. “And then inside the home office, we have a team of about 38 or so internal wholesalers that support that external effort. We spend all our time talking to financial advisors and trying to help them understand how the Pacer ETF solutions fit into client portfolios.” 

Their product lineup includes the Pacer Trendpilot Series, Pacer Cash Cows Index Series, Pacer Custom ETF Series, Pacer Leaders ETF Series, Pacer Factor ETF Series and Pacer Swan SOS ETF Series. The Pacer U.S. Cash Cows 100 ETF (COWZ) is up 4.5% in the past year. 

The issuer’s Pacer US Large Cap Growth Leaders Index (COWG) is also among this year’s finalists in the best new US equities ETF category at the upcoming etf.com’s Awards. The event will take place on May 2 in New York, where winners of all 15 categories will be announced.

Challenging the Traditional Approach

The original investment thesis of the Cash Cows ETFs challenged the traditional “value premium” approach based on buying low-price-to-book stocks that yield higher returns. 

“Our premise was that the world has changed. We're not a manufacturing-based society anymore,” O’Hara said. “Today 90% of the stock market value is based on intangibles, things you can't see, touch, pick up or put a price tag on.” 

Instead, Pacer ETFs’ screening process focuses on the free cash flow a company generates divided by its enterprise value. 

“If I were to buy the whole company in total, what would I have to pay? And then how much cash return would I get every year? And the higher as a percentage that cash return is leasing, the cheaper that stock is relative to its peers or its broad-based index.” O’Hara explained. “There's a fair amount of research that we've done on this before we launched the product that indicated we would be able to generate excess returns versus our benchmarks. And so far, that's been the case across the board.” 

Given the inflationary environment and the latest Fed minutes published last week, Pacer ETFs seems confident its Cash Cows products will continue to be popular with investors. 

“If we start to see a little bit of an earnings recession or shrinkage in overall earnings, then that can be a bit of a headwind. We don't think about it in terms of what our goals are,” O’Hara noted. “But if we had that kind of an environment, we feel like Cows can continue to be positioned, all of the Cows ETFs, from large cap U.S. to small cap to international global to even emerging markets all trading under 10 times earnings, and most of them are in the five to seven times range.” 

 

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Daria Solovieva is a former managing editor at etf.com. Before joining etf.com, she worked as a financial journalist for leading publications all over the world, including Fortune, The Wall Street Journal, Bloomberg and others.