The healthcare sector has certainly been fraught with a myriad of challenges this year, but weakness in the sector could have investors looking for value-oriented plays. That, in turn, could positively affect value-focused funds like the VictoryShares Free Cash Flow ETF (VFLO).
While the general healthcare sector is experiencing challenges, certain names may shine above others. Cigna and Merck are two companies to watch — both part of VFLO’s top 10 holdings. VFLO tracks the Victory U.S. Large Cap Free Cash Flow Index (the Index), and inclusion hinges upon a company’s expected free cash flow (a forward-looking measure of a company’s future cash flows), rather than solely relying on past data from trailing cash flow figures. The result is a more targeted focus on whether a company can continue growing its cash flow operations minus capital expenditures. The Index screens in companies that are relatively undervalued with attractive growth prospects, especially those in the healthcare sector, which already attracts bargain hunters.
Value in a Challenged Industry
During the height of the pandemic, healthcare stocks were strong performers until the tail end of 2021 when the bullish momentum began to fade. Since then, the sector has been marred by regulatory scrutiny as well as high costs, but a McKinsey & Company report noted that tailwinds such as pharmaceutical and healthcare delivery innovations could position the sector for a comeback.
By focusing on FCF, the index that VFLO seeks to track (before fees and expenses) has been able to identify names in the healthcare sector that appear primed for investment.
A Value Complement to Growth
In today’s market, it’s difficult to ignore the strength of growth and momentum factors. However, reviewing opportunities across the healthcare spectrum is a reminder that value investing strategies haven’t fallen to the wayside.
That said, investors can always use VFLO as a complement to a portfolio that’s already exposed to growth-fueled names in big tech. This can help provide investors with opportunities they wouldn’t otherwise get if too heavily concentrated in mega-cap technology companies.
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Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit http://www.vcm.com/prospectus. Read it carefully before investing.
The views expressed are as of the date noted, and are subject to change at any time based on market or other conditions. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any of portfolio.
All investing involves risk, including the potential loss of principal. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. ETFs may trade at a premium or discount to their net asset value. Index Funds invest in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Fund may diverge from that of the Index. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions. The fund could also be affected by company-specific factors that could jeopardize the generation of free cash flow. The value of your investment is also subject to geopolitical risks such as wars, terrorism, trade disputes, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies.
The Victory U.S. Large Cap Free Cash Flow Index aims to select high quality companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly. This Index calculates free cash flow yield by dividing expected free cash flow by enterprise value. Expected free cash flow is the average of trailing 12-month FCF and next 12-month forward free cash flow. Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization.
VictoryShares ETFs distributed by Victory Capital Services, Inc. (VCS). VCS is not affiliated with VettaFi.
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VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
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