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Jun 19, 2025

Insights From ETFs: The Cash Cow Growth ETFs

by Michael Huynh

The imminent trade-off in investing

The conventional wisdom in the investing industry divides investors into two camps: growth and value investors. Growth investors are the ones who seek high-growth companies that are still early in their growth journey, expecting that these companies can continue to reinvest and compound capital on behalf of shareholders for many years. These young enterprises are optimized for market share and growth rather than profitability. For instance, Walmart (WMT), Home Depot (HD) or Costco (COST) in their early days reinvested most of their profits into opening new stores. In other words, these businesses pursued long-term growth at the expense of current profitability. Shrewd growth investors understand this dynamic and are willing to sacrifice current profitability for an opportunity for a greater amount of profitability down the road.

The opposite is also true for value investors who value current profitability more than future growth. These investors actively seek profitable companies with abundant free cashflow that are ready to be distributed to them either through buybacks or dividends. However, as a result of limited opportunity, these investors are content with low or no-growth businesses.

Investors constantly face the puzzle of which investing strategy is the better option:

  • Companies with attractive free cashflow, but limited growth opportunity or
  • Businesses with limited current free cashflow but an appealing growth prospect in the long term.

The Best of Both Worlds: High-Quality and Growth

There is a tiny subset of publicly traded stocks that can provide investors with both attractive current cashflow and solid growth opportunities. These companies are rare, and the investing community usually refers to them as “high-quality businesses”. By definition, these are companies that not only generate consistently healthy and growing cashflow year after year but also possess a bright prospect for many years in the future.

These companies are such appealing prospects for the following reasons:

  • These companies earn a high return on capital but can also grow without the need for significant capital reinvestment. For example, imagine the extra cost for a software company like Microsoft to license one additional subscriber to access their software solutions like Excel, Word, etc., or how much extra does it cost Google to process a search query by users?
  • Most of the revenue flows straight to the bottom line, as it does not cost much once the initial investment (in terms of research and development) has been laid out.
  • These companies do not require a factory, machine, etc. or any meaningful physical footprint (aside from some data centres, which can be leased) to generate an extra dollar of revenue.

Therefore, incremental profits at these companies are brilliant, and these companies are also referred to as “cash cow” businesses. Combining favourable economics of high-quality businesses with a tailwind of high growth. Investors could enjoy a double tailwind for their investments. These companies tend to reward their investors handsomely over time, and buying and holding a portfolio of these companies through thick and thin is one of the most sustainable ways to grow wealth over time.

Here are two Exchange-Traded Funds (ETFs) that give investors exposure to this investment area:

Pacer Developed Markets Cash Cows Growth Leaders ETF (EAFG)

The Pacer Developed Markets Cash Cows Growth Leaders ETF (EAFG) provide investors with exposure to the best growth companies in the MSCI European Australasia and the Far East (EAFE) Index by screening for quality factors with strong growth opportunities.

The fund targets high-quality companies in developed markets for high free cashflow margins and attractive long-term upside potential driven by a long runway for growth. EAFG is a decent-sized ETF which has $1.0 billion in Assets Under Management (AUM) and a Management Expense Ratio (MER) of 0.65%.

EAFG’s portfolio is broadly diversified across sectors, including Communication Services (21.4%), Information Technology (19.6%), Industrials (19.5%), Consumer Discretionary (19.1%), etc. The holdings in the ETF provide investors with exposure to high-quality and strong growth themes without targeting any specific sectors.

The fund is rebalanced semi-annually in March and September, and all holdings are capped at 5% at the time of rebalance. The holdings are equities across developed markets, consisting of Japan (24.99%), Australia (9.76%), the United Kingdom (7.77%), etc. The fund currently has 104 names within the portfolio, with some of the fund’s largest positions including Spotify Technology (SPOT) at 4.51%, Pro Medicus Ltd (PME.AU) at 3.25%, Grab Holdings (GRAB) at 3.02%, Nintendo Co (7974 JP) at 2.62%, and Konami Group (9766 JP) at 2.53%.

The overall portfolio is trading at a very attractive valuation, with a 22.5 times Price/Earnings (P/E), a free cashflow margin of 21.7% on average, and the fund is currently offering a twelve-month trailing yield of 1.1% that is paid out monthly.

Pacer U.S. Small Cap Cash Cows Growth Leaders ETF (CAFG)

The Pacer U.S. Small Cap Cash Cows Growth Leaders ETF (CAFG) pursues a similar strategy to EAFG but focuses primarily on the U.S. market and within the small capitalization universe. The strategy is to seek high-quality, strong-growth companies within the S&P Small Cap 600, screened by above-average free cashflow margins.

CAFG’s portfolio has an average free cashflow margin of 18.9%, which is superior compared to the S&P Small Cap 600 Index of only 5.5%. The companies in the portfolio have a decent track record of generating growing free cashflow organically.

CAFG’s portfolio is heavily dominated by three sectors, including Health Care (26.3%), Information Technology (22.7%) and Industrials (21.4%). The fund currently has 102 holdings, with some of its largest positions including Corcept Therapeutics (COPT) at 4.5%, Pacira BioSciences (PCRX) at 3.0%, Adtalem Global Education (ATGE) at 2.7%, InterDigital (IDCC) at 2.6%, and A10 Networks (ATEN) at 2.58%

CAFG currently has around $18.9 billion in AUM, charges an MER of 0.59% and has a modest twelve-month trailing yield of 0.34%.