The Pacer Emerging Markets Cash Cows 100 ETF (NASDAQ: ECOW) is a Cash Cows family of ETFs covering emerging market equities. Boasting a yield of 6.7% and a high free cash flow yield, an ETF focused on emerging market companies looks attractive and has outperformed some of the other major emerging market ETFs in recent years. So let’s take a closer look at ECOW.
Cash rules everything around me
Recently, the popular Pacer US Cash Cows 100 ETF (Bat: COWZ), Pacer US Small Cap Cash Cows 100 ETF (Bat: calf), and Pacer Developed Markets International Cash Cows 100 ETF (Bat: ICOW). All of these ETFs prioritize investing in companies with high free cash flow yields, and ECOW is no exception. It just puts a different twist on the strategy by focusing on emerging market equities with high free cash flow yields.
Why prioritize high free cash flow yields? Think of it this way. Free cash flow is the cash left over after a company pays expenses and items such as interest, taxes, and long-term investments. This is cash that can be used to buy back shares, pay dividends to investors, and even for mergers and acquisitions. A positive free cash flow indicates that the business is generating more cash than it needs, thus indicating that the company is successful. This cash can be used to drive future growth and create shareholder value.
Free cash flow yield is essentially how cheap a stock is based on the free cash flow it generates, similar to how the price-to-earnings ratio (P/E ratio) tells you how cheap or expensive it is. It’s a way of measuring height. Stocks are based on their earnings. Free cash flow yield is calculated by dividing a company’s free cash flow by its market capitalization (using the company’s enterprise value, which can also include cash and debt).
Low P/E ratios are theoretically more attractive to investors, but high free cash flow yields make stocks more desirable for investors using this metric. Many prominent investors believe that the FCF yield is a more accurate measure of a company’s financial health than the P/E ratio because it is easier to adjust or modify earnings than free cash flow. increase.
ECOW prioritizes these types of companies by screening the top 100 companies with the highest free cash flow, starting with the FTSE Emerging Markets Index, which includes 500 companies. These investments are then weighted by free cash flow yield (higher yields are more weighted) and positions are capped at 2% so that the ETF is not dominated by a small number of stocks.
This has allowed ECOW to filter out many weaker emerging market stocks and end up with 100 shares with an impressive free cash flow yield of over 21%. Additionally, a by-product of this strategy is that these 100 holdings have an attractive average P/E ratio of less than his 5. This seems like an effective strategy. Because these are emerging market companies that have successfully generated surplus cash and can use this cash to: We create value for our shareholders.
solid track record
This sounds like an effective strategy, but how has it worked in practice over the last few years? Over the past three years, ECOW has provided investors with a combined annualized return of 8.8% at the end of the most recent quarter. have provided. This return is based on the S&P 500 (SPX) and Nasdaq (NDX) Recall that in the same timeframe, ECOW’s investment universe is emerging market equities, which have lagged behind the US market in recent times.
Instead, let’s compare ECOW to two of the largest and most popular emerging markets ETFs today — the Vanguard FTSE Emerging Markets ETF (NY SEARCA: VWO) and the iShares MSCI Emerging Markets ETF (NY SEARCA: EEM). Over the same three-year period, VWO’s total annual return was 6.7% for him, while EEM’s total annual return was 7.1% for him. As you can see, using free cash flow yield to screen for quality emerging market stocks has allowed ECOW to outperform its larger peers over the past few years.
It may not sound like a big difference, but ECOW seems to have a clear edge here, and these performance differences add up over time.
While one could argue that investors should invest in the S&P 500 ETFs instead of these emerging market funds, there is no value in gaining exposure to emerging markets for U.S. and other developed market investors. I think there is To diversify away from their home market and take advantage of the higher long-term growth potentially offered by emerging markets.
ECOW Holdings
Now that we’ve covered ECOW’s strategy and performance against emerging market competitors, let’s look at the individual components. ECOW holds 100 stocks and its top 10 positions account for only 23.4% of its holdings, making it a highly diversified ETF. For those wondering why this number is over 20% when each position is capped at 2%, it’s because some holdings are better than others and regular because it holds a larger percentage of the fund until it rebalances to
Below is a list of ECOW’s top holdings using the TipRanks holdings tool. Many US investors, myself included, are probably unfamiliar with each of these stocks, so ETFs like ECOW can help you invest in a basket of these types of stocks.
ECOW is also highly diversified across industries and countries. Not surprisingly, emerging markets are known for energy and raw materials, so energy and materials are the largest industries represented here, both with around 20% weight. Industry also accounts for just under 20%, with information technology and communication services each accounting for 12.8% and he 12.1% of the holdings.
China has the largest weight by country, but still accounts for just under 20% of the overall weight. Taiwan and Brazil are the only countries with double-digit weights for her in the fund. China is a huge market, so some emerging market ETFs are dominated by Chinese stocks, which isn’t necessarily a bad thing, but leaves more exposure to China than investors realize. I’m here. That’s why I like ECOW’s comprehensive approach.
Takeaway
ECOW has an effective strategy for screening high-quality emerging market companies and over time has outperformed its emerging market peers, albeit marginally. It offers ample diversification among individual holdings, markets, and industries. What’s more, the dividend yield is attractive at around 7%.
The only downside is that the expense ratio is 0.7%, which is higher than I would normally like to see, but a fund that focuses on emerging markets and employs a more complex strategy than simply investing in indices Usually more expensive. For comparison, EEM’s expense ratio of 0.69% is about the same as his ECOW, but ECOW performs better.
For U.S. investors and those in developed markets in general, adding ECOW to a portfolio while also holding one of Pacer’s U.S.-focused ETFs like its flagship COWZ product. i like the idea. This allows investors to own many of the top US companies by free cash flow yield while gaining exposure to high-quality emerging market companies.
Disclosure
