Funding Thesis
The Pacer US Money Cows 100 ETF (BATS:COWZ) is a portfolio of 100 U.S. shares with excessive free money circulate yields, leading to high-quality picks with low valuation ratios. Over time, it is also develop into Pacer’s personal money cow. This various ETF has amassed $13.20 billion in property below administration because it launched in December 2016, and with a comparatively steep 0.49% expense ratio, Pacer is raking it in annually. By all accounts, COWZ is a hit.
COWZ underwent one other quarterly reconstitution replace efficient June 20, 2023. This text summarizes the 18 modifications made and analyzes the whole ETF’s fundamentals, together with focus, volatility, development, valuation, profitability, and earnings power metrics. I look ahead to strolling you thru the most recent numbers and deciding if upgrading my ranking on COWZ to a purchase is cheap.
COWZ Overview
COWZ tracks Pacer’s proprietary US Money Cows 100 Index, deciding on large-cap Russell 1000 shares primarily based on their free money circulate yields. Free money circulate is an organization’s money circulate from operations much less capital expenditures, and this determine is split into an organization’s enterprise worth (market capitalization plus debt much less money) to reach at free money circulate yield. The screening course of leads to a dramatically completely different portfolio, illustrated properly on COWZ’s newest truth sheet. Notice that these outcomes don’t mirror the latest reconstitution, but it surely explains how completely different COWZ is from plain vanilla funds.
As of March 31, 2023, the Index’s Free Money Circulate Yield was 12.05% vs. 3.34% for the Russell 1000 Index, leading to low valuation ratios. Pacer’s declare of choosing high-quality large-cap corporations can also be fairly correct. As I’ll spotlight later, COWZ has a $58 billion weighted common market capitalization and a 9.35/10 Profitability Rating.
REITs are eligible, however different Monetary securities are usually not, with reconstitutions occurring quarterly on the third Friday in March, June, September, and December. One criticism is that constituents are weighted primarily based on trailing free money circulate (not yield) regardless of utilizing ahead free money circulate and earnings to outline the choice universe. I feel it is a flaw, and I predicted in March 2022 how COWZ could be sluggish to unwind its Power holdings even with its frequent quarterly reconstitutions. Even amidst weak point within the sector, COWZ continues to be 35% Power.
Efficiency Evaluation
Compounded Returns
The next efficiency chart is a main instrument for many buyers. It compares an ETF’s complete returns (assuming reinvested dividends) with an acceptable peer group. On this instance, I selected the iShares Russell 1000 Worth ETF (IWD) and the iShares Russell 1000 ETF (IWB) as a result of these are the 2 benchmarks Pacer makes use of on its fund web page.
I do not know which benchmark is extra acceptable. On the one hand, COWZ all the time has a low valuation ratio, so it is sensible for IWD to be its main benchmark, which is Pacer’s desire. However, its picks are usually extremely unstable, which isn’t a attribute of large-cap worth ETFs. Subsequently, IWB is likely to be higher from that perspective. Both method, COWZ’s 12.66% annualized return since January 2017 is spectacular. It barely beat IWB’s 12.55% per 12 months achieve and crushed IWD by 5% per 12 months. Contemplating the way it’s additionally a high-fee fund, it is simple to imagine the technique works.
Nevertheless, these charts are usually not best evaluation instruments and may trigger buyers to chase returns, particularly if the supply of returns (and why it’ll proceed) isn’t understood. COWZ gained 41.70% and 0.20% in 2021-2022 due to its growing publicity to Power shares. A proof for why Power shares would proceed outperforming, whilst inflation declined, ought to have accompanied any purchase ranking on COWZ. Furthermore, Power costs are notoriously troublesome to forecast.
Annual Returns
Another is to view an ETF’s annual returns relating to the way it ranks towards different appropriate friends. Morningstar is an effective place to begin in your analysis. As proven beneath, COWZ ranked within the third efficiency quartile between 2017-2019, then was a prime performer from 2020-2022, and is now again to below-average efficiency, underperforming 61% of its friends.
COWZ’s assigned class has modified over time, transferring between Giant Mix, Giant Worth, and Mid Worth. First, let’s take into account the worth facet. The next desk summarizes the annual returns for COWZ and 29 large- and mid-cap worth funds with no less than as a lot efficiency historical past as COWZ. Within the final row, I calculated COWZ’s rating utilizing returns via Might.
The conclusion is much like the one offered by Morningstar, but when COWZ had been positioned within the Giant Worth class in 2017, it will look even higher. Nonetheless, returns are inconsistent, and this implies timing dangers. Once more, it is important to grasp why an ETF outperformed so you may decide if that success will proceed. In any other case, you might need purchased COWZ in January 2023 primarily based on its #1 rank from 2020-2022.
Now let’s cowl the big mix class. Listed below are the returns for 29 different large- and mid-cap mix ETFs you would possibly use as comparators for COWZ. To keep away from redundancy, I’ve omitted three S&P 500 ETFs (IVV, VOO, and SPLG), as a substitute utilizing returns for the SPDR S&P 500 ETF (SPY).
The rankings are typically worse, which is predicted in a principally bullish market. COWZ nonetheless ranked #1 in 2021-2022. Nevertheless, I hope you agree that more often than not, COWZ is an average-performing ETF. That is to not take something away from its most profitable years, however I am not satisfied the free money circulate yield display screen was mandatory.
For what it is value, I expressed bullish sentiment for the sector with my December 2021 overview of the iShares Core Excessive Dividend ETF (HDV), noting the sturdy 25+ 12 months correlation between returns for Exxon Mobil (XOM) and modifications within the common annual inflation price. For a similar cause, I downgraded HDV as inflation obtained below management. The timing was good, as HDV outperformed SPY by 20.69% within the first half of 2022 however has lagged by 13.77% from July 2022 onwards. I did not depend on free money circulate metrics to make these judgments.
COWZ Evaluation
COWZ Reconstitution Abstract: 18 Additions
COWZ made 18 additions this quarter. Nevertheless, most had been small- and mid-cap shares with lower than 1% weightings. I’ve listed them from greatest to smallest beneath, together with their YTD return statistics via June 16, 2023.
D.R. Horton (DHI) was essentially the most vital addition. The inventory is up 31.22% YTD, which might negatively impression FCF Yield. Nevertheless, DHI’s TTM FCF per share elevated from $4.02 to $7.85 over the past quarter. The homebuilder smashed earnings expectations in April, and administration now sees larger revenues for the rest of the 12 months. In consequence, DHI now has an “A-” In search of Alpha EPS Revision Grade and a powerful 4.91 Quant Rating.
Others, like Sirius XM Holdings (SIRI), had been added due to a declining share worth. The corporate’s TTM FCF per share is regular between $0.37-$0.40, however SIRI is down 31.76% YTD. The result’s the next free money circulate yield, making it extra prone to qualify for COWZ. Not like DHI, the corporate’s fortunes aren’t bettering, but it surely’s extra of a deep worth, nearly contrarian play.
COWZ Reconstitution Abstract: 17 Deletions
The Index deleted 17 shares with a mixed 8.24% weighting as of Might 31, 2023. It is a surprisingly quiet reconstitution for a fund with a 114% portfolio turnover price for its most up-to-date fiscal 12 months. I’ve listed the 17 deletions beneath. Not like the additions, the place there’s a combine between strong- and poor-performing shares this 12 months, the deletions are nearly all up on the 12 months.
AutoNation (AN) is one instance. The automotive retailer’s free money circulate per share is on the uptrend and was $22.20 for the twelve months ending March 2023. Nevertheless, its 39.01% achieve pushed it out of worth territory.
Macy’s (M) is one exception. The inventory’s TTM FCF per share has fallen off a cliff recently, declining to $0.52 from $6.89 six quarters in the past. For my part, these are “good” deletions. A low share worth is justified; there is not any level in attempting to catch a falling knife. Direxion can attest to that after its Fallen Knives ETF (NIFE) closed final 12 months.
Total, the modifications had been primarily associated to the denominator within the free money circulate yield calculation (lowering enterprise worth) moderately than the numerator (growing free money circulate). Nonetheless, these corporations solely account for 8% of the portfolio. Let’s examine how the remainder of the portfolio appears to be like subsequent.
COWZ Prime Holdings and Sector Exposures
COWZ’s prime ten holdings are listed beneath. The Index applies a 2% capping at every reconstitution, so sadly, this checklist is not very complete. For example, Valero Power (VLO), Marathon Petroleum (MPC), and ConocoPhillips (COP) are the three Power shares within the prime ten. Nevertheless, there are 20 others, and the sector has a 35.47% complete weight.
Well being Care (16.53%), Supplies (13.86%), and Shopper Discretionary (13.57%) are subsequent, whereas there’s little or no publicity to Shopper Staples, Utilities, Actual Property, and, as talked about earlier, Financials.
COWZ Fundamentals By Trade
The next desk gives a extra full view of COWZ, summarizing its prime 25 industries, which complete 91% of the fund. Included within the backside rows are abstract metrics for IWD and IWB and metrics for COWZ earlier than its reconstitution.
A number of observations:
1. COWZ stays a extremely unstable ETF, evidenced by its 1.29 five-year beta and the upper normal deviation from the sooner efficiency chart. Traders ought to anticipate it to outperform the broader market in bullish intervals and might want compensation for the extra danger. After all, some buyers do not thoughts additional volatility so long as the returns are passable.
2. COWZ would not display screen for development, so we should not anticipate it to attain nicely on that issue. After the reconstitution, it is barely behind IWD on gross sales and EBITDA development and 3-4% behind IWB. What’s noteworthy is that in March 2022, COWZ’s development charges had been considerably larger and according to IWB.
3. As anticipated, COWZ excels in valuation. It trades at 11.67x ahead earnings and 6.42x trailing money circulate, considerably higher than IWD and IWB.
4. By weighting corporations by free money circulate, COWZ successfully secures a excessive profitability rating of 9.35/10. Its constituents have a 15.41% weighted common trailing free money circulate margin, so Pacer’s assertion that COWZ focuses on high-quality U.S. corporations is correct. IWB is shut at 14.57%, however COWZ is exclusive as a result of it achieves excessive profitability by deciding on smaller corporations. I calculated an 8.33% overlap by weight between the 2 funds, much like the 8% that the ETF Analysis Heart notes pre-reconstitution.
5. COWZ has weak earnings and worth momentum. It is regular, as it is a deep-value fund, but it surely’s considerably excessive. Constituents are up a weighted common of two.95% YTD in comparison with 8.06% and 23.75% for IWD and IWB. Moreover, COWZ’s 5.14/10 EPS Revision Rating suggests they don’t seem to be performing as nicely for a very good cause. With few exceptions, analysts are usually not bullish, significantly amongst Oil & Gasoline shares. Oil & Gasoline E&P corporations comprise 20.21% of COWZ, and right here is how the highest 5 rating utilizing In search of Alpha’s Quant Issue Grading System:
As proven, all have both “C-” or “D+” EPS Revision Grades. Nevertheless, the extra vital downside is the unpredictability of oil costs. For instance, the U.S. Power Data Administration notes a large confidence interval for the worth of crude oil within the brief time period, starting from about $30-$145 per barrel by 2025 primarily based on choices market info.
Assigning over one-third of a portfolio’s weight to this unstable sector feels extra like playing than a sound technique. COWZ should still be acceptable as a solution to enhance publicity to Power, however sector ETFs do the identical factor.
Funding Advice
I proceed to view COWZ as too dangerous, so I made a decision to not improve my ranking. My criticisms embody inconsistent annual efficiency, excessive focus within the unstable Power sector, and below-average development estimates. Moreover, weak worth and earnings revisions point out it is primarily a contrarian play, which is not my funding type.
On the constructive facet, COWZ’s reconstitution wasn’t eventful, however the ETF saved its glorious valuation and profitability options. You’ll be able to rely on this every quarter, so COWZ is likely to be appropriate if you’re searching for particular publicity to these components. It additionally would possibly complement different worth methods properly because it avoids essentially the most distinguished U.S. shares, however I counsel solely a minimal weighting. Please let me know for those who plan to make use of COWZ in your portfolio within the feedback beneath, and as all the time, attain out with any questions you could have. Thanks for studying.