The Small-Cap Strategy You Haven’t Heard About

In a market dominated by mega-cap tech stocks, finding value requires looking where others aren’t. 

The Pacer US Small Cap Cash Cows 100 ETF (CALF) takes a unique approach to small-cap investing. 

Many small-cap companies struggle to generate actual cash from their operations.

This ETF solves that problem by screening for companies that don’t just show profits on paper, but generate real cash flow.

Our TrackStar data shows financial pros increasingly looking for alternative strategies as traditional market-cap weighted funds become more concentrated.

Let’s examine why this cash flow strategy might be the key to small-cap investing success.

Key Facts About CALF 

• Net assets: $9.0 billion
• 12-month trailing yield: 1.06%
• Inception: June 17, 2017
• Expense ratio: 0.59%
• Number of holdings: 99

CALF takes Warren Buffett’s favorite metric – free cash flow – and applies it to the small-cap universe. 

The fund starts with the S&P SmallCap 600 index, then identifies companies generating significant cash from their operations.

Source: Pacer

The ETF employs a systematic approach, screening for the top 100 companies based on free cash flow yield. 

This strategy helps find businesses that can fund their own growth and weather economic storms without relying on external financing.

The latest portfolio rebalancing shows the strategy identifying strong performers across various industries. SkyWest leads the holdings at 2.64%, followed by Mueller Industries at 2.50% and Hanesbrands at 2.34%.

Source: Pacer

The fund’s disciplined approach maintains a 2% cap on individual holdings, ensuring no single company can significantly impact performance. 

This protects investors while still allowing them to benefit from the strongest cash-generating small caps.

Source: Pacer

Performance

The ETF’s performance demonstrates the effectiveness of its strategy. Since inception, it has delivered a 10.50% annualized return, outpacing traditional small-cap indices. 

Year-to-date performance shows a slight decline of 2.46%, but the one-year return of 12.63% indicates strong recovery potential. The five-year return of 15.14% proves the strategy works across different market cycles.

Most impressively, the fund has consistently outperformed the S&P SmallCap 600 Value Index, showing that focusing on cash flow rather than traditional value metrics can lead to better results.

Source: Pacer

Competition

Several other ETFs compete in the small-cap space, but each takes a different approach. 

• Vanguard FTSE All World ex-US Small-Cap ETF (VSS): VSS provides international small-cap exposure outside the U.S. with a low expense ratio of just 0.07%.
• iShares Micro-Cap ETF (IWC): IWC moves down the market cap spectrum to micro-caps, taking on additional risk for potential higher returns.
• Invesco S&P SmallCap 600 Pure Value ETF (RZV): Emphasizes value by selecting U.S. small-cap companies with strong fundamentals like earnings and book value. It uses an equal-weight strategy to maximize exposure to undervalued opportunities.
• USAA MSCI USA Small Cap Value Momentum Blend Index ETF (USVM): Combines U.S. small-cap value stocks with momentum factors, emphasizing companies with strong past performance and undervalued prices. Holdings are weighted using a blend of value and momentum scores.

Among these options, CALF stands out for its pure focus on domestic small-caps with strong cash generation. 

While its 0.59% expense ratio is higher than some competitors, the unique strategy and strong performance justify the cost.

Our Opinion 8/10

CALF offers a compelling alternative in the small-cap space. 

Its focus on free cash flow helps identify quality companies that can fund their own growth, which is particularly important in today’s high-rate environment.

The quarterly rebalancing keeps the portfolio fresh, while the sector diversification prevents over-concentration in any single area. 

The strategy has proven itself through different market cycles, consistently identifying small-cap companies with sustainable business models.

Though the expense ratio runs higher than some passive options, the outperformance versus traditional small-cap indices suggests the active approach adds value. 

For investors seeking exposure to small-caps but worried about company quality, CALF provides a thoughtful solution that emphasizes fundamental business strength over market sentiment.