VictoryShares Small Cap Fr CA Flw ETF's Average Process Pillar and People Pillar ratings result in a Morningstar Medalist Rating of Neutral. The portfolio maintains a sizable cost advantage over competitors, priced within the cheapest fee quintile among peers.  

 The strategy gets an Average Process Pillar. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in liquidity exposure and an underweight in momentum exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And low momentum exposure is rooted in holding stocks that are not currently on a winning streak and instead holding those that managers believe are undervalued. The strategy’s management team earns an Average People Pillar rating. The strategy's parent organization earns the firm an Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

Scorpio Tankers

Globus Medical

Roivant Sciences Ltd

Dillard's

Mueller Industries

International Seaways

HF Sinclair Corp

Teekay Tankers

Graham Holdings

Avnet

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. VictoryShares Small Cap Fr CA Flw ETF earns an Average Process Pillar rating. The predominant contributor to the rating is that this fund tracks an index. Historical data, like Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. A low expense ratio, with fees ranking in its category's cheapest 20%, also contributes to the process. A higher expense ratio reduces net returns, so being affordable gives this fund a significant advantage. Lastly, the process is limited by the parent firm's five-year risk-adjusted success ratio of 48%. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. The parent's relatively low success ratio suggests that the firm could do better across its fund lineup.

The investment strategy as stated in the fund's prospectus is:  The investment seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Victory U.S. Small Cap Free Cash Flow Index.  Under normal circumstances, and the fund seeks to achieve its investment objective by investing at least 80% of its assets in securities in the Index and at least 80% of its assets in equity securities with small market capitalizations. The index is designed to deliver exposure to equity securities of U.S. issuers within the Parent Index that have high free cash flow yields. 

 The portfolio is overweight in energy and consumer cyclical relative to the category average by 22.5 and 6.0 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and real estate, underweight the average by 15.1 and 6.1 percentage points of assets, respectively. The portfolio is composed of 202 holdings and its assets are more dispersed than the typical peer in the category. In the most recent disclosure, 13.9% of the portfolio's assets were concentrated in the top 10 fund holdings, compared to the category average's 24.4%.

Average

Process

Victory Capital’s  team is comparable to peers, resulting in an Average People Pillar rating. There are two managers listed on the fund: Mannik Dhillon, Lance Humphrey. Together, they manage a total of seven strategies, with an asset-weighted average Morningstar Medalist Rating of Neutral. This means, in aggregate, the team falls short and will struggle to produce positive alpha relative to the category median.  

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

People

As Victory Capital Management expands a roster of investment teams that runs the gamut,  it retains an Average Parent rating.

Victory operates a multiaffiliate model. It centralizes operations, compliance, and distribution while giving its 12 franchises investment autonomy. The franchise lineup had long been composed of those primarily focused on small/mid-cap equities. But the 2019 acquisition of fixed-income shop USAA Investments (which was rebranded as Victory Income Investors in April 2023) represented a significant change to that model. The firm has continued to broaden from there, acquiring three new franchises since the start of 2021: THB Asset Management (an environmental, social, and governance specialist), New Energy Capital (an alternatives manager), and WestEnd Advisors (a third-party model strategist). Overall, Victory is as big and diverse as ever: Its assets under management as of March 2023 was $157.6 billion, much higher than the $52.8 billion level as of December 2018.

Victory’s bright spots include Sycamore Capital and Trivalent Investments, which boast strong investment cultures, good levels of manager ownership, and solid capacity management processes. But there are questions elsewhere. Victory Capital Solutions has made some questionable subadvisor changes and dubious exchange-traded fund launches in recent years; Victory Income Investors has seen several departures since the 2019 acquisition and will absorb another franchise, Incore, in September 2023.

Parent

VictoryShares Small Cap Free Cash Flow ETF

SFLO tracks an index composed of 200 small-cap US companies based on profit that are perceived to have strong free cash flow yields and high growth metrics.

VictoryShares Free Cash Flow ETF

Utilizing factors as part of an investing strategy can potentially enhance diversification, improve returns, and manage risk or volatility. Common style factors include growth, value, quality, momentum, and size.

How Free Cash Flow ETFs Introduce Factors to Portfolios

A significant portion of small caps are unprofitable, making it essential for investors to fully understand the composition of their small-cap exposure. 40% of small caps in the Russell 2000 Index are unprofitable, according to an article from Kiplinger's published earlier this year, and very few small-cap companies generate meaningful free cash flow.

Free Cash Flow May Help Investors Avoid Unprofitable Small Caps

VictoryShares' lineup of free cash flow ETFs has seen continued interest among investors. The VictoryShares Free Cash Flow ETF (VFLO) and the VictoryShares Small Cap Free Cash Flow ETF (SFLO) attracted strong interest and healthy flows in February 2024.

Free Cash Flow ETFs See Continued Investor Interest

Investors who are underexposed to small-cap stocks may be missing out on compelling growth potential. Many investors avoid small caps, unaware they can mitigate some unwanted risk by focusing on companies with attractive free cash flow yields.

How SFLO Compares to the Small-Cap Value Benchmark

VictoryShares has two ETFs in its suite offering exposure to companies with attractive free cash flow yields. The VictoryShares Free Cash Flow ETF (VFLO) and the VictoryShares Small Cap Free Cash Flow ETF (SFLO) are constructed using the same innovative methodology, but each provides nuanced exposure to the U.S. market.

VFLO or SFLO: Which Free Cash Flow ETF Is Right for You?

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