ICOW ETF: Cash Cow That Is Worthy Of Consideration

Finding stocks that will provide a good return in an overvalued market is difficult. Investors have used free cash flow yield as a benchmark to determine the strength of the company. Pacer Developed Markets International Cash Cows 100 ETF (BATS:ICOW), is a strategy-driven exchange traded fund that aims to provide capital appreciation over time. It screens the FTSE Developed ex-US Index for the top 100 international companies based on free cash flow yield.

Valuation

Developed markets ex-US have much lower valuation. Based on forward Price to Earnings, EMU is at 12.5, U.K. is at 10.4, and Japan is at 12.7 in comparison to U.S. at 18.5. Over the long term, valuation matters in investing.

Below is the valuation going back to the mid-90s.

Similarly, Canada has a forward PE ratio of 12.8.

Most of the stocks in ICOW ETF are from the countries where valuations are much more reasonable compared to the U.S.

About the fund

ICOW selects high quality ex-US companies in the developed markets based on their ability to generate high free cash flow yield. Pacer Funds aims to find healthier companies by screening them and then rebalancing them on a quarterly basis.

Benchmark

The benchmark is the FTSE Developed ex-US Index. The benchmark is a market-capitalization weighted index representing the performance of large-cap and mid-cap companies in the developed markets. The developed markets include countries like the United Kingdom, France, Germany, Japan, Canada, Switzerland, Australia, Austria, Belgium, Denmark, Finland, Ireland, Israel, Italy, Netherlands, New Zealand, Norway, Portugal, Spain, and Sweden.

Screening Methodology

Methodology is the strict rules based to screen the top 100 companies that meet the quality criteria. The process is repeated on a semi-annual basis, and there is a 2% weighting cap to reduce company-specific risk. The first step is to screen from among 500 companies. The top 100 companies that are selected are then weighted based on free cash flow yield for the past 12 months and capped at 2% weight for any company. In June and December, the fund is reconstituted and rebalanced.

Holdings

The top ten holdings in the ICOW ETF include well-known companies from Europe, Japan, and Australia. ICOW portfolio has a 17% free cash flow yield while the FTSE Developed ex-US has a 4.4% free cash flow yield.

The top four sectors that makeup 75% are industrials, energy, materials, and consumer discretionary.

Countries that make up more than 47% of the fund are Japan, UK, and Canada.

Characteristics

The dividend yield of ICOW ETF is 6.25% compared to 3.25% for the benchmark. The free cash flow yield is 17.06% for ICOW ETF, while it is 4.40% for the benchmark.

Rating

Morningstar has given it 4 stars in the foreign large*value funds category.

Fund Performance

Let us review a comparison of ICOW to other similar investment choices like Vanguard FTSE Developed Markets ETF (VEA), iShares MSCI ACWI ex-U.S. Index Fund (ACWX), and Schwab International Equity ETF (SCHF).

Since its inception in 2017, ICOW has outperformed VEA, ACWX, and SCHF.

Since the COVID bottom in 2020, ICOW has returned 76%, which is much better than VEA, ACWX, or SCHF performances of around 50%.

ICOW, based on performance over the medium term, is worthy of consideration for anyone who wants to invest in the ex-US developed markets as part of their asset allocation.

Compared to well-known developed markets funds, what Pacer charges for ICOW is expensive.

ICOW ranks high for dividends and momentum. Besides being expensive, ICOW selects the top 100 stocks and so is considered riskier, and also appears less liquid than peers.

Dividends and the growth of dividends are impressive.

Assets under management are minuscule compared to the other funds.

Risks

ICOW ETF has not gone through a prolonged bear market, so it is hard to judge how well it would hold up in a 2000-2003 or 2007-2009 recession scenario. Currency risks are another factor to take into account when investing in foreign ex-US funds.

Conclusion

ICOW has outperformed funds in its category over the medium and long term. ICOW has likely outperformed due to its proprietary screening criteria and regular rebalancing. The Annual fee is higher than average; however, it is well covered by the dividend. Due to its screening criteria, I am expecting ICOW to outperform funds from its category. Based on one’s time horizon and risk tolerance, a certain percentage can be allocated to ICOW as a long-term investment.