GFLW rebalance adds Caterpillar, Dell and Royalty Pharma

VictoryShares' free-cash-flow ETF added Caterpillar, Royalty Pharma and Dell Technologies to its portfolio after the June reconstitution, and when ETF Trends reviewed the changes on September 1, Caterpillar stood at 3.13% of assets, Dell at 2.82% and Royalty Pharma at 2.10% as of July 31—a spread that is the screen's arithmetic rather than a manager's judgment.

The same rebalance halved a 114% winner — Sterling Infrastructure — and reading the two moves side by side shows the fund clipping a hot winner while adding a heavy-machinery maker, an intellectual-property holder and a computer company. That mix is less a macro forecast than the printout of a four-step quantitative screen, and the mechanics are worth unpacking.

The index behind GFLW starts with the VettaFi US Equity Large/Mid-Cap 1000 Index, removes financials and real estate, drops any company whose five-year free-cash-flow trend is negative, and then sends the 400 largest profitable large- and mid-cap names to the FCF ROIC screen, where expected free cash flow—averaged from the trailing twelve months and the next twelve months of forward estimates—is divided by invested capital.

From there, the top 150 FCF ROIC names are graded on sales trend, EBITDA trend and long-term EPS growth estimates, and the 100 highest scores become the index; weights then combine free-cash-flow size with one-year risk-adjusted momentum, capped at 4% per holding and 45% per sector, with no sector allowed more than 20 percentage points above its starting universe weight.

The Sterling cut comes from these mechanics: a 114% run in three months doesn't disqualify a company, but it changes the momentum math, and the growth score has to keep going as cash-flow growth compounds, so GFLW's rules trimmed the stake nearly in half. What entered on the other side is the screen doing the same work in reverse. Caterpillar, Dell and Royalty Pharma sit in different corners of the market but share enough post-capex cash generation to clear the FCF ROIC hurdle at the moment the screen looks.

ETF Trends' review makes the case that free cash flow is a cleaner read on operating quality than earnings—capex is subtracted in full and non-cash charges do not distort the number—which is the heart of GFLW's pitch. The quarterly reconstitution enforces it: every three months the index rebuilds, so a company can enter in July and leave in September if its cash-flow growth or momentum score slips.

The flows suggest the pitch is landing: the VictoryShares free-cash-flow pair crossed $10 billion and $1 billion on the same day last month, and GFLW's steady additions are part of that move. Advisors are buying the screen, not the style box. A quarterly rebalance that cuts a winner and buys a cyclical is exactly the kind of behavior that gives rules-based investing its credibility.

None of this makes GFLW an index of certainty: forward estimates feed the FCF math, and the momentum weight will lag a sharp reversal. The next quarterly reset will show whether Caterpillar and Dell survive the momentum overlay or rotate out, with the screen alone making that call.