– Pacer Emerging Markets Cash Cows 100 ETF (NASDAQ:ECOW) focuses on high free cash flow yield companies in emerging markets, outperforming larger peers over the past three years.
– ECOW’s strategy involves selecting the top 100 companies with the highest free cash flow yield from the FTSE Emerging Markets Index and capping positions at 2%, resulting in a diversified portfolio with an impressive free cash flow yield of over 21%.
Ladies and gentlemen, don’t put your hat on, as we have some exciting news today. The Pacer Emerging Markets Cash Cows 100 ETF (NASDAQ:ECOW) is making waves in the corporate world, and for good reason. It’s part of the Cash Cows family, covering emerging market equities and focusing on high free cash flow yield companies.
Now, I know what you’re thinking, why should free cash flow yield be a priority? Well, let me enlighten you. Free cash flow is the money left over after a company pays expenses, interest, taxes, long-term investments, and other items. That surplus can be used to buy back shares, pay dividends to investors, or even finance mergers and acquisitions. In essence, a positive free cash flow indicates a successful business because it implies the company is raking in more green than it really should.
ECOW takes this strategy to the next level by focusing on emerging market equities with high free cash flow yields. Its performance has outshined some of the other leading emerging market ETFs over the past few years. For the past three years, ECOW provided investors with an 8.8% annualized total return at the end of the most recent quarter. Now, some might argue that this return lags the combined return of the S&P 500 and Nasdaq, but let’s remember, ECOW’s investment universe is emerging market stocks that have recently underperformed the US market.
Let’s compare ECOW to two of today’s largest and most popular Emerging Markets ETFs, the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) and the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM). Over the same three-year period, VWO’s gross annual return was 6.7%, while EEM’s gross annual return was 7.1%. Clearly, ECOW has been able to outperform its larger peers by using free cash flow yields to select quality emerging market stocks.
But let’s dive deeper into ECOW’s strategy. It starts with the FTSE Emerging Markets Index of 500 companies and looks for the top 100 companies with the highest free cash flow. These investments are weighted by free cash flow yield, with higher yields being weighted. Positions are capped at 2% to prevent the ETF from being dominated by a small number of stocks. As a result, ECOW has filtered out many weak emerging market stocks and ended up holding 100 shares with an impressive free cash flow yield of over 21%. A byproduct of this strategy is an attractive average P/E ratio of less than 5 for these 100 holdings.
This strategy seems effective, as these emerging market companies can successfully generate surplus cash and use that cash to create value for their shareholders. ECOW holds 100 different stocks and its top 10 positions only account for 23.4% of its holdings, making it a highly diversified ETF.
Emerging markets are known for energy and commodities, so it’s not surprising that energy and materials are the largest sectors, both with around 20% weight. Industrial products also accounted for nearly 20% for him, while information technology and communication services accounted for 12.8% and 12.1% respectively. By country, China has the largest weight, but its overall weight is still close to 20%. Taiwan and Brazil are the only countries with double-digit weights for her in the fund.
So, what’s the catch? Well, there’s only one. An expense ratio of 0.7% is higher than I would typically like to see, but funds that focus on emerging markets and employ more complex strategies than simply investing in indices usually come with a heftier price tag. By comparison, EEM’s expense ratio of 0.69% is about the same as ECOW’s, but ECOW is better.
For U.S. Investors and Investors Residing in Developed Countries, ECOW provides an excellent opportunity to diversify their portfolio by investing in high-quality emerging market equities with a focus on free cash flow returns. Its balanced approach allows for exposure across a wide range of industries and countries, and its screening process ensures a portfolio of companies that have successfully generated excess cash and created value for their shareholders. The only downside is the high expense ratio, but as the saying goes, you have to pay for quality. So, if you’re looking to add diversity to your portfolio and are willing to pay a little extra for good performance, ECOW may just be the moneymaker you’re looking for.