First Trust has introduced a new ETF in the US providing sector-neutral exposure to a subset of S&P 500 companies with the highest free cash flow yields.
Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.
The First Trust S&P 500 Diversified Free Cash Flow ETF (FCFY US) has been listed on NYSE Arca with an expense ratio of 0.60%.
Free cash flow is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. It represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. The metric is important because it shows the amount of funds that a company possesses to pursue opportunities that enhance shareholder value.
By focusing on free cash flow, the methodology may be better able to scrutinize the underlying corporate fundamentals of each company. Indeed, management tends to have less discretion on how free cash flow is reported, compared to other metrics such as sales, earnings, assets, or liabilities which can, in some cases, be massaged.
Ryan Issakainen, Senior Vice President and ETF Strategist at First Trust, said: “In our view, companies with strong free cash flows may be better equipped to endure some of the challenges of a weakening economy and higher interest rate environment. We believe FCFY may be an effective core holding for those seeking exposure to the strongest, most profitable stocks in the S&P 500 Index, while also avoiding significant sector biases.”
Methodology
The fund is linked to the S&P 500 Sector-Neutral FCF Index which selects 20% of the companies within each GICS sector of the S&P 500, choosing the firms with the highest free cash flow yields (free cash flow relative to enterprise value).
Constituents are weighted by free cash flow yield while setting the weight of each GICS sector equal to its weight in the S&P 500. Any single stock is subject to cap and floor levels of 5.0% and 0.25%, respectively.
The index is reconstituted and rebalanced semi-annually.