Tap Cash-Rich Stocks & ETFs to Weather Rising Bond Yields
Billionaire investor Ray Dalio believes the stock market could face greater pressure as bond yields climb and companies struggle to turn earnings growth into stronger cash flows, as quoted on CNBC. Although corporate profits are still supporting equities, the Bridgewater Associates founder warned that this cushion may not last much longer.
Speaking to CNBC at the Milken Institute Asia Summit in Singapore, Dalio said stocks have so far held up despite the global bond sell-off because their expected returns remain attractive compared with bonds. However, rising yields and higher stock valuations are gradually narrowing that advantage.
Rising Bond Yields Could Put More Pressure on Stocks
U.S. Treasury yields remain elevated as investors weigh persistent inflation, large government deficits and the growing borrowing needs of companies investing in artificial intelligence (AI). Note that benchmark 10-year U.S. Treasury bond yields have been hovering around a two-decade high lately.
Dalio said stocks initially benefited from offering better expected returns than bonds. But as share prices rise and bond yields move higher, the relative appeal of equities weakens. This leaves the market with less room to absorb further increases in interest rates, as mentioned on CNBC.
How to Play the Scenario With Cash-Rich Stocks and ETFs
Free Cash Flow Matters More Than Earnings Alone
Dalio urged investors to look beyond headline earnings when assessing corporate strength. Companies may report higher profits while spending heavily on expansion, technology and other investments, leaving them with less cash available.
He expects earnings to keep improving but warned that free cash flow could deteriorate. That gap matters because businesses need actual cash to fund operations, repay debt and support future investment.
Bet on Cash-Cows
Cash cow investing is a strategy that has gained popularity among investors seeking stable and consistent returns. The term “cash cow” refers to companies or investments that generate a significant amount of cash flow relative to their expenses.
Some ETFs explicitly screen for free cash flow, while others target quality, profitability or shareholder yield, which may overlap with strong cash generation. Let’s highlight a few cash-cow ETFs that should prove intriguing bets at current levels.
VictoryShares Free Cash Flow ETF VFLO
The underlying Victory U.S. Large Cap Free Cash Flow Index measures the performance of U.S. Large Cap profitable companies that exhibit high free cash flow yield and higher growth characteristics. The fund charges 39 bps in fees. No stock makes up more than 4% of the fund.
Global X U.S. Cash Flow Kings 100 ETF FLOW
The underlying Global X U.S. Cash Flow Kings 100 Index provides exposure to large and mid-capitalization U.S. equity securities that exhibit high free cash flow yields relative to the eligible universe of companies. The fund charges 25 bps in fees. No stock makes up more than 3% of the fund.
Pacer US Cash Cows 100 ETF COWZ
The underlying Pacer US Cash Cows 100 Index uses an objective, rules-based methodology to provide exposure to large and mid-capitalization U.S. companies with high free cash flow yields. The fund charges 49 bps in fees and yields 2.01% annually. This fund also has less company-specific concentration risk.
Amplify Cash Flow Dividend Leaders ETF COWS
The fund’s strategy is to pick high free cash flow (FCF) companies that pay and have historically grown dividends. It is an equal-weight portfolio with an industry exposure cap of 24%. The fund charges 19 bps in fees. No stock makes up more than 4% of the fund.
Pacer US Cash Cows Growth ETF BUL
The underlying Pacer US Cash Cows Growth Index uses an objective, rules-based methodology to provide exposure to mid- and large-capitalization U.S. companies with high free cash flow yields. The fund charges 60 bps in fees. BUL has moderate company-specific concentration risks, each of the top three holdings takes more than 5% weight of the fund.
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This article originally published on Zacks Investment Research (zacks.com).