With the broader market hovering at lofty levels thanks to the Trump rally, the hunt for value is widespread right now. Market watchers and participants are trying out different valuation indicators and running screeners to land up on trustworthy stocks (read:
Time to Prepare for 'Trump Slump' with These ETFs?).
Many are also taking the ETF route to minimize stock-specific risks. After all, playing down risks is probably the sole motto of investors right now, in whatever way possible. Usually most investors focus on fundamental indicators such as the price-to-earnings ratio (P/E), price-to-book (P/B) and the PEG ratio to select companies with strong fundamentals.
But they often ignore cash flow measures. Since we know that a cash cushion is always needed in a rough market, one can easily take a look at the indicators related to cash flows to measure the performance of a company.
While this tool can be greatly exercised in case of stocks, investors can apply this in the basket approach too. This can be done by investing in ETFs rich with companies having low price-to-cash flow (P/CF) ratios.
Present State of Liquidity in the S&P 500
Cash and equivalents increased
7.6% year over year to $1.54 trillion at the end of the Q3 (August to October) and 6.3% sequentially for the S&P 500 (ex-financials) Index members. The balance in Q3 was the highest hoard in at least 10 years.
Microsoft (MSFT) and Alphabet (GOOGL) have the largest cash balance. These two tech-giants are at the head of the list classified by quarterly cash and short-term investments for the fourth successive quarter.
Naturally, the IT sector held the largest cash balance ($672.7 billion) at the end of Q3 while the Industrials, Telecom and Utilities sectors saw their cash balance depleting. The Consumer Staples sector witnessed the highest jump in cash balance, which amounted to about 26%
Trump Effect Elevated These Sector ETFs to Rank #1). Future Cash Outlook Seems Bright
If this was not enough, corporate earnings growth for Q4 of 2016 is on the way to be the highest in eight quarters. This should reverse the previous trend of cash exhaustion. Things should turn more favorable in the coming days if Trump’s planned fiscal reflation becomes a reality.
In the Trump administration, there are more savings expected from companies from tax cuts (from 35% to 15%) and cash repatriated from abroad under the repatriation tax holiday (about 10%). If this happens, several big companies would be cash kings, which can be deployed in activities like merger and acquisitions, buybacks, and capital expenditure (read:
Buyback ETFs: Trump Beneficiary or Overhyped Bets?).
So, for investors, we have highlighted five ETFs that focus on cash flow.
Pacer US Cash Cows 100 ETF ( COWZ Quick Quote COWZ - Free Report)
Pacer ETFs, demand is huge for free cash flow yield strategies. The fund follows the Pacer Cash Cows 100 Index which uses an objective, rules-based methodology to provide exposure to large and mid-capitalization U.S. companies with high free cash flow yields. It charges 49 bps in fees. Pacer Global Cash Cows Dividend ETF GCOW
The product looks to track the Pacer Global Cash Cows Dividend Index to provide exposure to global companies with high dividend yields supported by a high free cash flow yield.
Cambria Shareholder Yield ETF ( SYLD
The actively managed fund invests in companies that show strong characteristics in returning free cash flow to their shareholders by way of cash dividends, share repurchases or by reducing their leverage. It charges 59 bps in fees.
iShares U.S. Technology ETF IYW
From the above analysis, we can understand that an IT fund is apt to get focus on strong cash balances. MSFT takes the second position with about 12.02% while Alphabet Class A and Alphabet Class C take about 12% share in total. The fund charges 44 bps in fees.
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