Pacer has introduced the first fixed income fund within its popular suite of ‘Cash Cows’ ETFs, which focus on companies generating high free cash flow.
Pacer has expanded its Cash Cows ETF Series into fixed income.
The Pacer US Cash Cows Bond ETF (MILK US) is listed on the Cboe BZX Exchange with an expense ratio of 0.49%.
Free cash flow, calculated as operating cash flow minus capital expenditures, measures a company’s ability to generate cash after maintaining or expanding its asset base. This metric is critical as it indicates a company’s capacity to produce cash beyond its operational needs, enabling investment in growth opportunities.
By emphasizing free cash flow, the Cash Cows methodology offers a rigorous approach to evaluating corporate fundamentals. Unlike metrics such as sales, earnings, assets, or liabilities—which can sometimes be adjusted—free cash flow is less susceptible to managerial discretion.
Traditional bond strategies primarily rely on credit ratings to guide portfolio exposure. In contrast, MILK employs a unique approach by targeting large-cap companies with high free cash flow yield and margin. Unlike bond ETFs restricted to investment-grade issuances, MILK has the flexibility to include bonds across the credit spectrum. The premise is that companies with high free cash flow are well-positioned to cover their interest expenses, regardless of their credit rating.
Sean O’Hara, President of Pacer ETF Distributors, said: “Building on the continued success of the Cash Cows Series, the launch of MILK was a natural next step in expanding our fund line-up.”
Methodology
MILK tracks the Solactive Pacer US Cash Cows Bond Index, which comprises bonds issued by companies included in the Pacer US Cash Cows 100 Index and the Pacer US Large Cap Cash Cows Growth Leaders Index. These sub-indices underpin two of Pacer’s most popular Cash Cows ETFs: the $25 billion Pacer US Cash Cows 100 ETF (COWZ US) and the $500 million Pacer US Large Cap Cash Cows Growth Leaders ETF (COWG US).
The Pacer US Cash Cows 100 Index selects the top 100 companies from the Russell 1000 Index based on free cash flow yield (free cash flow/enterprise value). The Pacer US Large Cap Cash Cows Growth Leaders Index, meanwhile, identifies the top 100 companies from the Russell 1000 based on free cash flow margin (free cash flow/revenue).
From the pool of eligible companies, MILK’s index includes bonds that are US dollar-denominated, have a time to maturity greater than one year, and a remaining par value exceeding $500 million. Bonds rated below B are excluded from the selection process.
Individual bonds are selected through an optimization process aimed at maximizing yield while adhering to portfolio-level constraints related to duration, sector exposure, and credit quality. The index employs an equal weighting scheme, with limits of 4% per issuer and 1% per bond.
Reconstitution occurs annually, while the index is rebalanced at the end of each calendar month.
