Could This Unique Small-Cap ETF Beat The S&P 500?
Small cap stocks have performed quite well in anticipation of Federal Reserve rate cuts, but as a group, they remain very undervalued relative to the S&P 500. And while investors can simply buy a Russell 2000 or S&P SmallCap 600 ETF if they want broad small-cap exposure, it's important to realize that there are some ETFs that use unique approaches that could be worth a look. Here's one small cap ETF in particular that has a strong record of outperformance and focuses on the most profitable small U.S. companies.
The Pacer U.S. Small Cap Cash Cows 100 ETF (NYSEMKT: CALF) takes a somewhat unique approach. The fund starts with the widely used S&P SmallCap 600 benchmark index of smaller U.S. companies, but it narrows its holdings down to the 100 that produce the highest free cash flow yield.
Just to clarify. This isn't a dividend focused ETF. It focuses on the most profitable small cap companies, not necessarily those that pay the most to shareholders. The theory is that companies that produce excess free cash flow have lots of money to buy back stock, pay dividends, or invest in growth opportunities that arise. The average company in the S&P SmallCap 600 Value index has a 3.38% free cash flow yield, while the average company in this ETF has FCF yield of more than three times this.
Source Fool.com
