Following a year in which a rapid rise in interest rates caused stock and bond prices to tumble, investors are focusing on quality. One way to do this is to look at free cash flow — and doing so might make for better long-term returns for growth investors.
Let’s begin with four sets of total returns for the Cash Cows ETF against ETFs that track its benchmark, the Russell 1000 Value Index RLV , and the S&P 500 SPX . He cited Google parent company Alphabet Inc. GOOGL as an example: The company’s market value is “based on the fact that they dominated search and figured out how to dominate it. Those are intangibles,” he said.
For Cash Cows, the rules-based stock-selection approach is based on trailing free-cash-flow yields. A company’s free cash flow is its remaining cash flow after capital expenditures. This is money that can be used to pay dividends, repurchase stock or expand organically or through acquisitions, or for other corporate purposes.
The remaining stocks are then ranked by trailing free-cash-flow yield, and the top 100 make the final list. These are weighted by free-cash-flow yield, with a maximum weighting of 2% for any stock.
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