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What You Need to Know About Cash-Cow ETF Investing

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Cash cow investing is a strategy that has gained popularity among investors seeking stable and consistent returns. The term "cash cow" refers to companies or investments that generate a significant amount of cash flow relative to their expenses. While this approach offers several advantages, it also comes with its fair share of drawbacks. Let’s delve into the pros and cons of cash cow investing.

Benefits of Cash Cow Investing

Lower Volatility:  Cash cow companies typically experience lower stock price volatility compared to growth stocks. With the ongoing uncertainties caused by the timing related to the Fed rate cut, global growth slowdown due to high rates and geopolitical crisis, cash cows offer better protection against downside. It's an appealing option for those who prefer a more conservative approach to investing.

Stable Cash Flow: One of the most significant advantages of cash cow investing is the consistent and stable cash flow it provides. Cash cow investments often involve well-established companies with strong financial positions. These companies tend to have established products or services with a loyal customer base, which results in predictable revenue streams.

Dividend Income: Cash cow companies often distribute a portion of their profits to shareholders in the form of dividends. This regular income can be an attractive feature for investors looking for a steady stream of cash.

Weakness of Cash Cow Investing

Limited Growth Potential: While cash cow investments offer stability, they may lack the growth potential seen in high-growth and less-matured companies. Cash cow businesses often operate in mature industries, where the ability to expand and innovation is limited.

Opportunity Cost: Investing in cash cow companies may mean missing out on potentially higher returns from growth stocks. Investors should note that growth stocks have been performing great in the past one year due to a less-hawkish Fed and the artificial intelligence boom. If you invest in cash cows, you are missing out on those exponential returns. For example, Pacer US Cash Cows 100 ETF (COWZ - Free Report) is up 12.5% past year in comparison with 53.6% gains witnessed in Technology Select Sector SPDR Fund (XLK - Free Report) .

Against this backdrop, below we highlight a few cash-cow ETFs that could be used for gains amid a market turmoil.

ETFs in Focus

Pacer US Cash Cows 100 ETF (COWZ - Free Report) -- Up 12.5% past year

Pacer US Cash Cows 100 ETF is a strategy-driven ETF that aims to provide capital appreciation over time by screening the Russell 2000 Index for the top 100 companies based on free cash flow yield. A high free cash flow yield indicates that a company is producing more cash than it needs to run the business and can invest in growth opportunities. COWZ holds 101 stocks in its basket and charges 49 bps in annual fees.

Pacer US Small Cap Cash Cows 100 ETF (CALF - Free Report) ) -- Up 22.5% past year

Pacer US Small Cap Cash Cows 100 ETF is a strategy-driven ETF that aims to provide capital appreciation over time by screening the S&P SmallCap 600 Index for the top 100 companies based on free cash flow yield. CALF tracks the Pacer US Small Cap Cash Cows Index and holds 101 stocks in its basket. It charges 59 bps in annual fees.

Pacer Cash Cows Fund of Funds ETF (HERD - Free Report) ) -- Up 11.4% past year

Pacer Cash Cows Fund of Funds ETF is a fund of funds ETF composed of Pacer Cash Cows ETFs. Each of the Pacer Cash Cows ETFs is a strategy-driven ETF that seeks to track the total return performance, before fees and expenses, of its underlying index. HERD holds five ETFs with 20% exposure each. It charges 74 bps in fees per year. The fund yields 2.53% annually.

Amplify Cash Flow Dividend Leaders ETF (COWS - Free Report) ) -- Up 12.5% past year

It is a strategy-driven ETF investing in U.S. companies with high free cash flow yield and dividend growth aimed to provide long-term capital appreciation and monthly income distributions. The Index picks U.S. companies with both high free cash flow yields and a three-year history of uninterrupted dividend growth. The fund charges 39 bps in fees, though net expense ratio is 0.00%.

Pacer US Cash Cows Growth ETF (BUL - Free Report) ) -- Up 14.6% past year

The underlying Pacer US Cash Cows Growth Index uses an objective, rules-based methodology to provide exposure to mid and large-capitalization U.S. companies with high free cash flow yields. The 51-stock ETF charges 60 bps in fees.

Pacer US Large Cap Cash Cows Growth Leaders ETF (COWG - Free Report) ) -- Up 27.6% past year

The underlying Pacer US Large Cap Cash Cows Growth Leaders Index uses a rules-based methodology that seeks to provide exposure to large-capitalization U.S. companies with above average free cash flow margins. The 101-stock ETF charges 49 bps in fees.

Pacer US Small Cap Cash Cows Growth Leaders ETF (CAFG - Free Report) ) -- Up 21.9% past year

The underlying Pacer US Small Cap Cash Cows Growth Leaders Index uses a rules-based methodology that seeks to provide exposure to small-capitalization U.S. companies with above average free cash flow margins. The 101-stock fund charges 59 bps in fees.

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