Invest In These ETFs To Capitalize On Cash Strength

by: Zacks Funds

With the broader market going off the deep end and the S&P 500 plunging to 2014 levels last week, the hunt for value is widespread right now.

Market watchers and participants are trying out different valuation indicators and running screeners to land up on trustworthy stocks. Many are also taking the ETF route to minimize stock-specific risks. After all, playing down risks is probably the sole motto of investors right now, in whatever way possible.

Usually, most investors focus on fundamental indicators such as the price-to-earnings ratio (P/E), price-to-book (P/B) and the PEG ratio to select companies with strong fundamentals. But they often ignore cash flow measures. As we know that cash cushion is always needed in a rough market, one can easily take a look at the indicators related to cash flows to measure the performance of a company.

While this tool can be greatly exercised in case of stocks, investors can apply this for the basket approach too. This can be done by investing in ETFs rich with companies having low price-to-cash flow (P/CF) ratios.

Below we highlight a few ETFs with such cash characteristics so that investors can find some safe shelters in this turbulent market.

iShares U.S. Financial Services ETF (NYSEARCA:IYG)

The financial sector is presently in a good shape, thanks to loan growth amid low interest rates, stepped-up investment banking activities to reflect the increased corporate actions and cost containment. Plus, if the Fed enacts further rate hikes this year, the sector would get some of the much-needed additional support and shore up its net interest margin too.

Apart from these positives, IYG boasts a few banking stalwarts like Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS). Each of these banks boasts a price-to-cash flow of under one. As a result, the fund can be considered as a safe destination in this downtime. However, this Zacks Rank #3 (Hold) ETF lost about 1% in the in the last five trading sessions (as of January 22, 2016).


The airline industry is a huge beneficiary of cheap oil. Fuel accounts for a large portion of airlines' operating expenses and thus a drastic decline in fuel prices is a blessing for this airline ETF. Otherwise, development in the airline industry is rampant these days. Busy traffic on improving travel and business demand, restructuring indicatives and limited capacity growth are some of the important tailwinds.

The first and fourth holdings of the fund, American Airlines Group (NASDAQ:AAL) and United Continental Holdings (NYSE:UAL), form about one-fourth of the basket and also carry low P/CF ratios of 2.77 and 3 times, respectively. The fund was up 4.3% in the last five trading sessions (as of January 22, 2016).

iShares PHLX SOX Semiconductor Sector Index ETF (NASDAQ:SOXX)

Since the second half of 2015 marked the rebound of tech stocks, semiconductors also hold promise. The semiconductor market will be propelled by smartphones and automotive in the coming days. Moreover, some analysts believe that the PC market is set for a rebound.

Semiconductor companies like Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA) and Applied Materials (NASDAQ:AMAT) have considerable exposure in SOXX. These stocks also have P/CF ratios in the range 3-4 times. SOXX has a Zacks ETF Rank #1 (Strong Buy) and added 2.9% in the last five trading sessions.

TrimTabs International Free-Cash-Flow ETF (NYSEARCA:FCFI)

While this fund does not directly deal with stocks with low P/CF ratios, it has an indirect approach to the same objective. The fund looks to track 163 international companies with the highest free cash flow yields in 10 international markets, namely Canada, Germany, United Kingdom, Hong Kong, Japan, France, Switzerland, the Netherlands, South Korea, and Australia.

Launched in June 2015, the fund has amassed about $12.7 million so far. Adecco S.A. (OTCPK:AHEXY), RELX NV (OTC:RDLSF) and ABB LTD (NYSE:ABB) are the top three companies of the basket. The 30-day SEC yield of the fund (as of December 31, 2015) is 2.13% annually. However, the fund gained 2.1% in the last five trading days (as of January 22, 2016).

Cambria Shareholder Yield ETF (NYSEARCA:SYLD)

With an asset base of $138.1 million, the fund is based on the research that free cash flow is a key predictor of a company's strength. This product invests in companies that show strong characteristics in returning free cash flow to their shareholders by way of cash dividends, share repurchases, or by reducing their leverage. The fund advanced about 1% in the last five trading sessions (as of January 22, 2016).

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