It’s quoted all the time, but I can’t stand adjusted EBITDA: earnings before interest, taxes, depreciation, and amortization, with management often adding back an even longer list of “one-time” expenses. The problem is that companies have considerable discretion over what gets excluded.
Stock-based compensation, restructuring charges, litigation costs, acquisition expenses, and other recurring items can all be labeled as exceptional, making earnings appear stronger than the underlying business really is. As the late Charlie Munger famously remarked, “Every time you see the word EBITDA, you should substitute the word ‘bulls***’ earnings.” To be fair, no single metric is manipulation-proof, but free cash flow is much harder to dress up than an adjusted earnings figure trailed by a page of add-backs.
I much prefer looking at free cash flow. Instead of focusing on accounting profits, free cash flow starts with cash generated from operations, subtracts capital expenditures, and leaves you with what is ultimately available to pay dividends, repurchase shares, reduce debt, or reinvest in the business.
However, the S&P 500’s free cash flow yield has fallen below 2%, near its lowest level in decades. Part of that reflects the enormous capex surrounding the AI buildout: several of the Magnificent Seven hyperscalers are now spending hundreds of billions of dollars annually on data centers, chips, networking equipment, and power infrastructure.
One way to potentially sidestep this is by focusing specifically on companies that continue generating abundant free cash flow — which is exactly what the VictoryShares Free Cash Flow ETF (VFLO) is built to do. According to testfolio.io, from Dec. 31, 2025 through July 1, 2026, VFLO delivered a 17.77% cumulative total return, beating the 9.97% return from the Vanguard S&P 500 ETF (VOO) over the same period.
That’s a short window, and consistently beating the S&P 500 remains a difficult task over long horizons. Still, the result is noteworthy, and I’m always interested in niche ETFs that come from outside the big three asset managers. Here’s what you need to know about VFLO and how it works.
How VFLO Works
VFLO is a passive ETF tracking the Victory U.S. Large Cap Free Cash Flow Index. One aspect of the methodology I particularly appreciate is that, unlike many competing free cash flow ETFs, it doesn’t rely exclusively on trailing free cash flow. I’ve never fully understood that approach; it’s a bit like driving while looking only in the rearview mirror.
Historical cash generation tells you what a company did, not necessarily what it is likely to do next. That distinction matters most in cyclical industries such as energy, where a single windfall quarter can temporarily inflate free cash flow and distort a purely backward-looking screen.
Instead, VFLO combines both trailing and forward-looking measures. The index starts with a company’s trailing 12-month free cash flow, then averages it with analysts’ consensus estimates for free cash flow over the next 12 months. The result is what the index calls expected free cash flow — an average of historical performance and future expectations.
There’s a fair critique here, and it’s worth stating plainly: forward free cash flow relies on analyst estimates, which tend to run optimistic. VFLO’s methodology hedges that by anchoring half the calculation in trailing, already-reported cash flow — so at least one leg stands on hard numbers rather than forecasts.
From there, the index calculates expected free cash flow yield by dividing expected free cash flow by enterprise value rather than market capitalization. Enterprise value differs from market cap because it also accounts for debt and cash on the balance sheet, providing a more complete measure of what it would actually cost to acquire the business.
The screening process doesn’t stop there. The index takes the roughly 75 companies with the highest expected free cash flow yields, then keeps the 50 with the strongest growth scores. That second cut helps eliminate mature businesses generating plenty of cash but offering limited long-term growth prospects. The resulting portfolio lands firmly in Morningstar’s mid-cap value style box — a notable outcome for an index with “large cap” in its name, and a sign of just how far the screen tilts away from the mega-cap leaders.
That selectivity isn’t free. VFLO charges a 0.39% expense ratio, versus 0.03% for a plain S&P 500 fund like VOO. Over time that gap is real, so the strategy has to earn its keep to justify the premium.
Income is not the objective here. VFLO currently offers a modest 30-day SEC yield of roughly 1%, but free cash flow can be allocated in several ways besides dividends. Management may decide to acquire other businesses, invest in research and development, pay down debt, or repurchase shares if they believe the stock trades below intrinsic value.
How Has VFLO Performed?
The year-to-date comparison above wasn’t meant to suggest VFLO will always outperform the S&P 500. Rather, it shows that beating the index this year didn’t necessarily require overweighting the Magnificent Seven or taking on more market beta.
The strength also isn’t limited to 2026. According to testfolio.io, over the roughly three-year period from the fund’s June 2023 inception through July 1, 2026, VFLO produced a 93.21% cumulative total return versus 77.77% for VOO, with a higher Sharpe ratio (1.17 versus 1.06) — meaning the outperformance didn’t come from simply taking on more risk.
That said, roughly three years is a single market regime, not a full cycle, and past performance never guarantees future results. There will inevitably be environments where a free cash flow strategy lags the broader market, just as value, quality, and momentum factors periodically fall out of favor. Even so, VFLO’s methodology has produced encouraging results since launch, and it’s a reasonable place to start for investors who want cash generation — not adjusted earnings — doing the screening.
Contact [email protected] for any questions or corrections.
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