Popular Cash Flow ETF Gaining Momentum
A popular ETF focused on cash flow, the Pacer U.S. Cash Cows ETF (COWZ), is starting to regain its momentum after underperforming the broader market in the first half of 2023. In the past two weeks, the ETF has reached several new highs, including a record closing price of $51.49 per share on Wednesday. Prior to July 31, the fund had not closed above $51 per share in over a year, according to FactSet. Although the fund has only gained 12% year to date, compared to the Nasdaq Composite’s 32% surge, all of the gains have been made in the past three months.
Rebound in Fund Flows and Oil Prices
Fund flows have also started to rebound after a slump in May and June. Over the past month, COWZ has attracted $200 million in new investments, bringing its total assets under management to over $14 billion. This rebound coincided with an increase in oil prices, as energy holdings make up the largest sector in the fund. Chevron is the fund’s largest position, and while its shares have been negative year to date, they have risen more than 3% over the past three months.
Outperforming Benchmark and Sector Peers
Despite the energy sector’s decline, COWZ has managed to closely track its benchmark, the Russell 1000 Value, in the first half of the year. Pacer ETFs President Sean O’Hara attributes this success to the robustness of the strategy. However, in the last 90 days, the energy sector picked up as the world recognized the supply-demand dynamics of oil production. In comparison, the iShares Russell 1000 Value ETF (IWD) has gained less than 7% year to date, while the average fund in COWZ’s category has gained less than 8%, according to Morningstar.
Custom Index and Sector Rotation
The COWZ fund is based on a custom index that is rebalanced quarterly. The index consists of Russell 1000 stocks with the highest free cash flow yield. The top 100 stocks are chosen for the index, with higher weights given to those with better cash flow metrics, up to a cap of 2%. While this process has resulted in an overweight position in the energy sector, it has also uncovered winners in other sectors. For example, Booking Holdings has become a top-five holding for the fund, despite not being included at all in January. The travel stock has surged about 60% year to date, with a significant increase in net income during the second quarter.
According to Sean O’Hara, the quarterly rebalance ensures a focus on the most current free cash flow yield and the companies with the highest free cash flow yield. This approach allows the fund to own companies that grow their earnings faster than their index.
