Cashing In on Small Caps

Cows in a field

Small-cap stocks are not to be overlooked, especially when they are packed into an exchange-traded fund (ETF) that works differently than others.

This particular ETF is Pacer US Small Cap Cash Cows 100 ETF (CALF). CALF gives investors access to the U.S. small-cap arena, but its methodology is a bit different than other funds, since it focuses on free cash flow and how to use it to maximize returns.

Using the S&P Small Cap 600 Index, the ETF screens out financial companies, except for real estate investment trusts (REITs). The rest of the holdings are mostly consumer cyclicals.

After that first filtering process, CALF then ranks the remaining companies by their trailing 12-month free-cash-flow yield, takes the top 100 companies from that pool and weights them by their trailing free cash flow yield. The weighting for each of the companies within the ETF is capped at 2%.

CALF’s free-cash-flow strategy aims to provide long-term capital appreciation. Using free-cash-flow yield to measure the sustainability of a company may produce potentially higher returns and more appealing upside/downside capture over time.

As you can see from the chart below, CALF has seen quite a bit of activity throughout the year. However, for each dip it has seen, it’s seen an equal or higher spike. The ETF plummeted in mid-September but within three months rebounded and is continuing to climb.

CALF has $1.41 billion in net assets and a 3.12% distribution yield. It is currently sitting comfortably near the high end of its 52-week range.

The fund’s top 10 holdings include Atlas Air Worldwide Holdings Inc. (AAWW), 3.07%; Sonic Automotive Inc. Class A (SAH), 2.51%; Academy Sports and Outdoors Inc. Ordinary Shares (ASO), 2.36%; Abercrombie & Fitch Co. Class A (ANF), 2.19%; Signet Jewelers Ltd. (SIG), 2.13%; Meredith Corp. (MDP), 2.11%; AMC Networks Inc. A (AMCX), 2.09%; Vir Biotechnology Inc. (VIR), 2.07%; Select Medical Holdings Corp. (SEM), 2.06%; and Mueller Industries Inc. (MLI), 2.04%.

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CALF is a unique ETF with a focus on small-cap stocks that generate high free cash flow. Further, the fund offers investors exposure to opportunities in the market where high-quality stocks are trading at a discount.

While CALF does provide an investor with a way to invest in small-cap stocks, using a unique strategy, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.