🐄Cash Flow Champions: Why CALF Is Your Portfolio's Hidden Gem

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Hello ETF UNO readers 👋 

If your portfolio is heavily weighted in mega-cap tech stocks and the usual S&P 500 names, consider the Pacer US Small Cap Cash Cows ETF $CALF ( ▼ 1.75% ) . This rules-based ETF targets smaller U.S. companies that generate strong free cash flow relative to their price, focusing on firms that are not just promising but also financially sound. It offers a blend of small-cap growth potential with a cash-flow-oriented investment approach.

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What is CALF?

CALF differentiates itself from typical small-cap funds by focusing on the top 200 small-cap companies with the highest free cash flow yield from the S&P US SmallCap universe. This strategy capitalises on the trend that high-quality small-cap stocks often trade at significant discounts compared to large-cap stocks.

Launched in June 2017, CALF tracks the Pacer US Small Cap Cash Cows Index and has an expense ratio of 0.59%. As of mid-November 2025, it has grown to approximately $3.7 billion in assets. Essentially, CALF combines "quality" and "value," prioritising companies that generate real cash flow over flashy narratives.

At the heart of CALF is free cash flow yield, defined as:

Free Cash Flow / Enterprise Value

• Free cash flow (FCF) = cash left after paying operating costs and capital expenditures.

• Enterprise value (EV) = market cap plus debt minus cash.

A high FCF yield suggests a company is generating a lot of cash relative to what the market is currently valuing it at.

CALF uses an objective, rules-based approach to identify small-cap U.S. companies with high free cash flow yields, rather than simply assessing "cheap looking" names.

1. 🎯Start Small: It begins by looking at the entire universe of US small-cap companies (over 2,000 stocks).

2. 🧹Filter Out the Weak: It then cleans up this list by removing:

   • Financial companies (except REITs).

   • Stocks that are hard to trade.

   • Companies that aren't expected to be profitable in the near future.

3. 💵Rank by Cash Power: The remaining companies are ranked by their "free cash flow yield"—a measure of how much cash they generate relative to their price.

4. 🐄Pick the "Cash Cows": The top 200 companies with the highest cash flow yield are selected for the fund.

5. ⚖️Weight and Balance: These companies are weighted by their cash flow, with limits on any single stock to avoid over-concentration.

6. 🔄Keep It Fresh: The entire portfolio is reviewed and updated every quarter to ensure it always holds the most attractive cash-generating companies.

This disciplined approach ensures that CALF consistently focuses on financially healthy, attractively priced small companies. The fund is reconstituted and rebalanced every quarter, allowing it to adapt to changing market conditions and maintain exposure to the most promising cash-generating small-cap opportunities.

Investment Strategy📊

For investors who understand the importance of strategic asset allocation, CALF can serve multiple roles in a well-constructed portfolio. Below are several strategies for its application.

• 🌟Strategic Small-Cap Satellite: This approach uses CALF as a targeted satellite to complement a core portfolio of broad-market and international equity ETFs, focusing on small-cap companies and high free cash flow. Typically, CALF may represent 5-10% of a portfolio, while core equity ETFs usually hold 70-80%. This combination provides diversified small-cap exposure while overweighting high-free-cash-flow companies, which may offer better risk-adjusted returns over time.

• ⚖️Style-Based Barbell Strategy: CALF acts as a value-focused counterbalance to growth-heavy investments, aiming to mitigate style-specific risks by combining opposing factors. The strategy involves allocating part of the portfolio to CALF for value and small-cap stocks, and an equal portion to growth-oriented ETFs.

• 🗂️Component within a Size-Based Allocation: This strategy positions CALF to target the "quality-value" segment of small-cap investments. Investors may allocate 30-50% of their small-cap allocation to CALF and 50-70% to a broad small-cap ETF for diversification. This approach helps maintain exposure to the small-cap market while focusing on companies with strong cash generation.

When implementing these strategies, it's essential to follow key guidelines. CALF is ideal for long-term investments, as factor premiums can take time to materialise. Investors should rebalance their portfolios semi-annually or annually to maintain target allocations.

CALF at a glance

ETF Issuer: Pacer ETFs

Inception: 2017-06-16

Asset Class: Equity

Underlying Index: Pacer US Small Cap Cash Cows Index

Geographical Focus: U.S.

Expense Ratio: 0.59% (as of last data point)

Dividend Yield: 1.37% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

Since its inception in 2017, CALF has shown strong performance compared to traditional small-cap benchmarks, especially in market conditions that favour quality and strong cash flow. Although it has faced some declines during bullish markets when growth stocks attract more attention, the fund continues to be a solid choice.

With a consistent dividend yield of approximately 1%, it offers a good balance of modest income along with the exciting potential for capital appreciation.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Quality Focus in the Overlooked Small-Cap Space: CALF provides exposure to financially strong small-cap companies that generate significant free cash flow. These "cash cows" have sustainable competitive advantages and resilient business models, enabling them to withstand economic downturns. In a small-cap market often marked by cash burn, CALF identifies reliable cash generators for you.

2. Potential Value Opportunity: Small-cap stocks with high free cash flow yields often trade at discounts to their intrinsic value. CALF's methodology identifies these undervalued companies, giving investors access to potential "hidden gems" in the small-cap sector. This approach has historically outperformed during market cycles favouring quality and value.

3. A Disciplined Process: CALF employs a disciplined, objective rules-based process. Its index is reconstituted and rebalanced quarterly, with a transparent methodology for selecting and weighting holdings. This approach reduces the risk of emotional decision-making by fund managers. For ETF investors seeking a systematic strategy, CALF offers consistent exposure to factor investing, maintaining its core philosophy over time.

Top 3 Reasons Not to Invest

1. Higher Costs Than Broad Market Alternatives: At 0.59% in annual expenses, CALF costs significantly more than broad small-cap index funds. While the active screening methodology justifies some premium, investors must carefully consider whether the potential outperformance justifies the higher fees, especially over longer time horizons where fees compound significantly.

2. Sector Concentration Risk: CALF focuses on high free cash flow yields, resulting in concentration in sectors such as oil and gas, software, media, and biotechnology. This concentration can lead to underperformance if these sectors decline, creating volatility that may concern risk-averse investors.

3. High Turnover and Tax Inefficiency: Quarterly rebalancing and active screening result in high portfolio turnover, leading to capital gains distributions that can create tax burdens for investors in taxable accounts. This poses a significant drawback for tax-sensitive investors compared to more passive, tax-efficient small-cap alternatives.

🤝Small-Cap Quality Meets Value

The Pacer US Small Cap Cash Cows ETF provides a unique approach to small-cap investing by focusing on free cash flow yield, which can lead to better risk-adjusted returns while still capturing growth potential.

However, it comes with trade-offs, such as higher fees, sector concentration, and tax inefficiencies. For those willing to navigate periods of underperformance, CALF can enhance small-cap exposure with a quality focus.

It’s best utilised within a diversified ETF portfolio rather than as a standalone investment. Consider pairing it with broad market ETFs or sector-specific funds for a balanced approach that manages risk while seeking returns.

At ETF UNO, we believe that understanding specialised ETFs like CALF is essential for building resilient investment portfolios. Whether you're starting your ETF journey or refining your strategy, clear and unbiased analysis is crucial.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.