COWZ: Nice Time To Purchase This Defensive ETF (BATS:COWZ)

Overview

Pacer US Money Cows 100 ETF (BATS:COWZ) is an S&P 500 (SPY) beating ETF that focuses on firms with excessive money move which might develop dividends over time and have wholesome steadiness sheets, with alternatives to capitalize on firms which can be buying and selling at a reduction. I previously covered COWZ in November 2023 and the ETF has delivered a complete return of 12% since then. Since my preliminary protection, the holdings throughout the ETF have been rebalanced and now the burden of publicity to every sector has modified. Due to this fact, I believed it could be a good suggestion to offer follow-up protection for COWZ to offer some perception into how the ETF has modified and what my anticipated outlook is on this present financial atmosphere.

The newest CPI report concluded that inflation nonetheless sits greater than anticipated. Consequently, we noticed a damaging market response with drops throughout the vast majority of sectors. For me, I see this as an enormous shopping for alternative as a result of I believe this response was a bit overdramatic. In any case, the CPI climbed 0.4% over March, which was solely barely over the anticipated 0.3% rise. This interprets into an extended interval of elevated rates of interest and a lowered chance that the Fed will begin chopping charges this quarter.

Though the beginning dividend yield could be very low at 1.8%, I throw this fund into the identical class as different dividend-focused ETFs alongside Schwab U.S. Dividend Fairness ETF (SCHD). It’s because the fund has averaged a wonderful dividend progress price since inception. I’ll contact on this dividend progress extra in-depth additional alongside on this article however first let’s dig into the revised holdings inside.

Fund Fashion – Filtered For High quality

COWZ implements a passive management-styled method which ends up in a complete administration payment of 0.49%. Which means that there aren’t any energetic managers that resolve which firms the fund holds. As an alternative, holdings are chosen primarily based on a method that probably by no means modifications. The fund has a method that filters potential holdings by market capitalization, means to generate free money move yield, and firms which have a longtime historical past of accelerating dividends. These metrics are all essential as a result of these are indicators of sturdy firms which can be excelling when it comes to profitability.

The method begins with the Russell 1000 Index consisting of 1,000 firms and a P/E (worth to earnings) of 27.39x. From right here, 100 firms are chosen and ranked by their free money move yields. These 100 holdings common out to a 7.66% free money move yield and a P/E of 11.54x. The free money move yield is a vital metric that contributes to this method’s success as a result of it signifies the amount of money move an organization generates relative to its market worth. Briefly, a better free money move yield is an efficient factor as a result of it implies that extra cash is being earned relative to the corporate’s market worth. That is an indicator that an organization is undervalued, which is what helps contribute to COWZ’s superior worth return.

The ultimate a part of the fund’s technique is to take these 100 holdings after which rebalance them so that every place will get capped at a 2% weighting. This leads to a closing fund free money move price of seven.88% and a P/E ratio of 11.77x. The fund’s holdings are reconstituted and rebalanced on a quarterly foundation, which ensures that the fund is benefiting from alternatives available in the market. With this, the fund was lately reconstituted, so let’s evaluation the up to date holdings and construction.

Up to date Holdings

The fund at present has internet belongings totaling $22.5B culminating throughout 103 completely different holdings. The biggest sector by weight is Power, making up roughly 24.4% of the whole breakdown. That is carefully adopted by the buyer discretionary sector which makes up 16.9% and the healthcare sector that makes up 13.3%. This primarily makes COWZ a guess on the vitality sector greater than the rest. Power firms are usually money move wealthy as a result of greater working margins between the revenues and working bills.

Like beforehand talked about, the portfolio is rebalanced in order that there aren’t any holdings which have a weight over 2%. Whereas 2% is the purpose, some holdings inevitably develop in worth to finally grow to be price greater than that 2% threshold. In actual fact, nearly all the highest ten holdings have grown to be price greater than 2% of internet belongings. As of the most recent reconstitution, we see some modifications from my preliminary protection 6 months in the past. For instance, listed below are essentially the most up to date high ten holdings. The highest ten holdings make up practically 22% of the portfolio.

Click on to enlarge

The big majority of those high ten holdings have both reported nice earnings or seen good worth progress. For instance, Marathon Petroleum Company (MPC) is up over 37% YTD and generated $14.1B in internet money from operations based on their newest earnings report. One other instance is Valero Power Company (VLO); up 30% YTD in worth and has lately increased their dividend by 4.9%.

Though the historical past is brief, we will see how the technique applied by COWZ provides stability to rate of interest sensitivity. When charges have been reduce in 2020, the value finally ended up rising by 2021. As soon as charges started to extend at speedy charges, we will see that the value traded sideways for a bit however remained steady. This stability provides peace of thoughts that the COWZ technique works in offering whole returns all through completely different market cycles. Now that it looks like charges usually are not going to get reduce anytime quickly, COWZ could be an awesome ETF to experience out the way forward for anticipated greater charges.

Power firms can depend on debt to finance capital expenditures like growth, ESG initiatives, infrastructure, analysis, and growth. These elevated rates of interest improve the prices of borrowing and curiosity funds on present debt. This idea additionally applies to all different firms throughout the opposite sectors not associated to vitality. Most firms offset this by briefly decreasing bills and perhaps even chopping headcount.

As well as, we have already seen the volatility that may be prompted when the subject of dialog involves rates of interest. In actual fact, Jerome Powell’s Fed conferences have been discovered to be three occasions extra unstable than his predecessors. COWZ provides a greater sense of stability throughout these moments of upper volatility. Even over a 6-month interval, we will see that COWZ examined a a lot greater worth low than the XLE. Whereas the XLE briefly dipped into crimson territory, COWZ recovered out of the crimson practically an entire 3 months earlier than the XLE did.

Good Entry Alternative

We will see how COWZ has outperformed the S&P 500 (SPY) in addition to the Power Sector ETF (XLE) in whole return. The outperformance margin began to widen again in 2022 which reveals that COWZ’s system of selecting prime quality, free money move yielding companies delivers higher outcomes. Whereas the value at present sits close to the all-time excessive of $58.48 per share, I nonetheless imagine there’s large alternative in holding shares of COWZ right here for the long run. An funding in COWZ is much like an funding in SCHD. What I imply is that an funding in both of those funds implies that it’s important to imagine within the method and technique that they observe.

The worth trades at a small low cost to NAV (internet asset worth). Whereas the low cost itself is not what’s essential, for the reason that low cost is virtually immaterial at -0.04%. Nevertheless, it is price mentioning that for the yr 2024, the fund has traded at a really small premium for 64 days. COWZ has traded at a reduction to NAV for less than 8 days of the yr to date.

As of the most recent declared quarterly dividend of $0.2443 per share, the beginning dividend yield sits at 1.8%. Whereas this actually is not a big sufficient yield to generate any kind of significant dividend revenue, until you tackle a big place larger than $1M, the dividend yield isn’t the principle attraction right here. Whereas the fund’s inception was solely in 2016, the dividend progress is the place the magic has occurred. Whereas the dividend payouts have been diverse since inception, whole progress has been distinctive.

We will see that the dividend has grown over 636% since inception. This blows SCHD and Vanguard Dividend Appreciation Index Fund ETF Shares (VIG) out of the water. Even on a smaller time-frame of 5 years, the dividend elevated at a CAGR of 17.41%. The technique of choosing excessive free money move yielding firms ought to in idea assist this degree of continued dividend progress. Whereas there are actually macro challenges as a result of excessive rates of interest, I anticipate dividend progress to be stronger throughout ideally suited market situations.

Downsides

The beginning dividend yield of 1.8% is a bit disappointing. Whereas the fund is not attempting to be a dividend progress fund completely, it could be higher to see some extra impactful dividend raises sooner or later. In an effort to generate a considerable dividend revenue from shares of COWZ, you want a number of hundreds of thousands invested ready to provide a residing revenue. For reference, the common particular person revenue within the US is $63,795 per yr. In an effort to generate this sort of money move, you’d want about roughly $3.5M invested to generate the common particular person revenue within the US.

Whereas the dividend progress is robust, SCHD provides a a lot better beginning yield that may compound into a bigger snowball rather a lot faster. That is as a result of greater beginning yield of three.5%, which is sort of double that of COWZ. Due to this fact, if you need any kind of significant dividend revenue with out having to attend for the expansion facet, SCHD is the higher fund right here.

As well as, if the US plunges right into a recession we will see additional worth suppression of the highest industries that COWZ has publicity to, resembling Power, client, and healthcare. The tightening of client spending can finally cut back profitability and restrict free money move yield progress. Whereas this may actually influence profitability metrics, a minimum of COWZ offers you the publicity to the businesses which might be managing these headwinds most effectively.

Takeaway

Pacer US Money Cows ETF has delivered sturdy outcomes due to the fund’s methodology for choosing high quality shares with rising free money move yields. This method’s confirmed monitor report outperforms the SPY and dividend progress centered ETF, SCHD. The portfolio’s holdings get rebalanced quarterly and this frequency helps maintain holdings updated. The biggest sector publicity is to vitality shares, that are recognized for his or her cash-rich companies. The draw back to COWZ is that the beginning dividend yield is comparatively weak and does not pack sufficient punch to ship sizeable revenue.