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The S&P Quality Free Cash Flow (FCF) Aristocrats Indices measure companies that consistently generate robust FCF over many years. FCF, the cash remaining after a business covers its operational costs and capital investments, is crucial because it provides financial flexibility. Companies with high FCF can invest in growth opportunities, pay dividends and reduce debt, making them more resilient in fluctuating markets.On Sept. 23, 2024, S&P Dow Jones Indices (S&P DJI) launched two indices in this new series: the S&P 500® Quality FCF Aristocrats Index and S&P Developed Quality FCF Aristocrats Index. In this blog, we will introduce these indices by reviewing their methodology and historical performance.
Methodology Overview
These indices track companies that have a minimum of 10 consecutive years of positive FCF, along with a high FCF margin and FCF return on invested capital (ROIC). FCF margin measures how efficiently revenue is converted into FCF, while FCF ROIC measures how efficiently invested capital is utilized to generate FCF.By concentrating on firms that excel in long-term FCF generation, this methodology aims to include only the highest-quality companies. Additionally, by prioritizing consistent and efficient FCF generation, this approach distinguishes itself from other FCF-based indices in the market, which tend to be yield-focused and exhibit a strong value tilt. 
Performance Insights
When looking at back-tested historical performance, these indices outperformed their regional benchmarks, delivering higher risk-adjusted returns and lower losses during market downturns. They provided a defensive investment strategy that balanced growth potential with stability, visible through their reduced volatility and lower downside capture ratios. 
Factor Tilts in S&P Quality FCF Aristocrats Indices
The S&P Quality FCF Aristocrats Indices primarily emphasize quality, including companies that typically exhibit high and consistent FCF generation. Additionally, these indices tilt toward growth since these companies can allocate excess FCF to research & development, advertising and marketing.As Exhibit 3 shows, this approach has historically resulted in improved return on equity (ROE) and operating margins compared to their benchmark indices, showcasing a balanced strategy that prioritizes both quality and growth. 
The regional S&P Quality FCF Aristocrats Indices offer a high quality, defensive approach, demonstrating outperformance versus their benchmarks with higher risk-adjusted returns and lower downside capture in falling markets, while matching the benchmark returns in rising markets over the back-tested period. Stay tuned for an upcoming blog, where we will compare the S&P Quality FCF Aristocrats Indices with the S&P Dividend Aristocrats® Indices.More By This Author:The Impact Of Sector Performance Through The Years
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