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The COWZ ETF was more heavily weighted towards energy, materials and healthcare last year than its parent FTSE Russell 1000 index © Bloomberg

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Pacer ETFs saw assets under management race past the $20bn milestone this month after the Pennsylvania-based boutique attracted record annual inflows for its cash flow-focused tracker funds during 2022.  

Cash flow is a key measure of the health of a company that is also employed as a metric for stockpicking by some active managers, such as Terry Smith at Fundsmith, but it has largely been overlooked by ETF providers which usually focus on market capitalisation values when constructing index-tracking ETFs.  

Pacer uses free cash flow yield — cash flows from operations minus taxes, interest and expenses payments and long term-investments as a percentage of a company’s enterprise value — to identify the constituents of its Cash Cows series of ETFs.

The flagship Pacer US Cash Cows 100 ETF (COWZ) saw its assets surge to $10.3bn at the end of December, up from just $1.3bn at the start of 2022, providing the main engine for the company’s growth. 

“COWZ deserves the accolade of ‘breakout product of 2022’ as it is very challenging for smaller providers to create funds that can win the attention of investors from the popular ETFs offered by the established managers,” said Todd Rosenbluth, head of research at VettaFi, the data provider.

COWZ chooses 100 companies based on free cash flow yield from the FTSE Russell 1000 index of large US companies. The approach meant the holdings in the COWZ ETF were more heavily weighted towards the energy, materials and healthcare sectors last year than its parent FTSE Russell 1000 index.   

“There are clear differences in the sector weightings for COWZ and broad US market benchmarks. COWZ also traded on a price to earnings multiple of less than 10 times throughout 2022, so it avoided the contraction in valuation multiples for tech stocks that did so much damage to the overall performance of the US market last year,” said Sean O’Hara, president of Pacer ETFs.

Shares in COWZ rose a modest 0.2 per cent in 2022 but this represented a massive outperformance compared with the FTSE Russell 1000 index, which dropped 19.1 per cent last year. COWZ has also outperformed the Russell 1000 over three and five years and since the ETF launched in mid-December 2016.

“Free cash flows can be seen as a proxy for the ‘quality’ and ‘value’ factors that performed well in 2022. But investors should be aware that periods of outperformance for a factor are sometimes followed by underperformance as market conditions change. If growth investing regains popularity, COWZ will face challenges to repeat its success,” said Todd Rosenbluth, head of research at VettaFi, the data provider.

Pacer Financial was founded in 2004 as a financial wholesaler to partner with investment managers that want to sell their products through registered investment advisers and broker dealers. It moved into fundraising for ETF managers in 2008 and decided that it had developed sufficient expertise to start manufacturing ETFs under its own brand in 2015. It now offers a range of 46 ETFs which attracted combined inflows of $11.4bn last year, up from the $3.1bn gathered during 2021, according to ETFGI, a London-based consultancy.

O’Hara said that Pacer wanted to extend the Cash Cows ETF series. Pacer launched a US Large Cap Cash Cows Growth Leaders ETF (COWG) in late December. This ETF chooses its 100 constituents from the Russell 1000 index based on free cash flow as a percentage of a company’s revenues.  

“We will aim to launch an international and a small US company version that use the same cash cows growth approach later this year,” said O’Hara.

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