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- [00:00]
Michael Batnik
Today's Animal Spirits Talk. Your book is brought to you by PACER ETFs. Go to PACER ETFs.com to learn more about the PACER NASDAQ 100 Top 50 Cash Cows, Growth Leaders ETF QQQG Again, that's paceretfs.com to learn more. Welcome to Animal Spirits, a show about.
- [00:18]
Ben Carlson
Markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching.
- [00:25]
Michael Batnik
All opinions expressed by Michael and Ben.
- [00:27]
Ben Carlson
Are solely their own opinion and do not reflect the opinion of Ritholz Wealth Management. This podcast is informational purposes only and.
- [00:34]
Michael Batnik
Should not be relied upon for any investment decisions.
- [00:37]
Ben Carlson
Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
- [00:45]
Sean O'Hara
Welcome to Analyst Spirits with Michael and Ben. On today's show we are joined by Sean o' Hara. Sean is the director of PACER Financial and the president at Pacer ETFs. Free cash flow. What a bear. That was on the CFA test, right? I remember I had a whiteboard. I hate whiteboards. Big anti whiteboard guy. But I did have a whiteboard in my bedroom with all of the different formulas. Remember free cash flow to the firm, free cash flow to operations. You remember that stuff.
- [01:15]
Michael Batnik
I definitely had a couple of sheets that were laminated on both sides.
- [01:19]
Sean O'Hara
Do you start with net operating profit after tax or do you start with ebit? Ooh, horrible. And even to this day, free cash flow is not really readily available at most casual websites. Right?
- [01:32]
Michael Batnik
I bet you can find it. It's probably much easier to find these days than it used to be.
- [01:35]
Sean O'Hara
You know What, I'm sure ChatGPT can help. But like at a generic stock website, you see sales, you see maybe margins, obviously market cap, all those sort of metrics. But we spoke today about like I think that the ETF wrapper at this point is something that we take for granted just because it's so ubiquitous. It's been part of, part of the building blocks for financial advisors for so long, but it really is kind of an amazing product when you think about it.
- [02:02]
Michael Batnik
Can you imagine trying to make some of these strategies yourself with 50, 100 and 150 names, calculating them, rebalancing, figuring that out. Yes. The fact that it is just so easy and automated is in a tax efficient wrapper. It's wonderful. It's a wonderful step forward for individual investors. We're a pro ETF podcast.
- [02:21]
Sean O'Hara
Absolutely. All right, so I feel like that's enough of an intro. What do you Think.
- [02:27]
Michael Batnik
No, but the free cash flow thing, the reason that is important is because sometimes you could see a company with low or negative earnings and this was the whole Amazon thing forever. Remember people thought Amazon was overvalued for years and years and years. Wasn't that why you shorted it Fundamentals?
- [02:42]
Sean O'Hara
Well also like things like stock based compensation, not that it's not an expense, but it's not cash flow.
- [02:49]
Michael Batnik
So you're looking at how much money these companies are actually producing and, and it's a different metric and sometimes these fundamentals can be at odds with one another and understanding especially I think for tech stocks, it makes a lot of sense to look at it this way. So again, we spoke to Sean o' Hara today from PACER about their cash cows Growth Leaders ETF QQQG here's our conversation with Sean.
- [03:14]
Sean O'Hara
Sean, welcome to the show.
- [03:15]
Ben Carlson
Thanks for having me. I appreciate it.
- [03:17]
Sean O'Hara
I saw a note from Gina Martin Adams this Morning posted on LinkedIn where she shared a chart that shares that shows the operating margin since the year 2000 of the S&P 500 alongside information technology as well as X information technology. And you probably know where I'm going with this. The S&P 500 and X InfoTech follow each other for the most part but operating margins for information technology stocks have gone from what was this like a 14% whatever it is up to 35% all time high. No, no, no cap there. It just keeps going up into the right. And this to me is the one of the defining stories of the stock market in the United States over the last 15 years. Despite all of the claims of trees don't grow to the sky, the law of large numbers incorrectly used. Nobody I think could have predicted that the, the inherent leverage in these businesses were would continue to expand and expand. So that's a nice segue into the conversation that we're going to have. The ticker for the ETF that we're talking about today is qqqg so it is a spin on some of these information technology names. What are you trying to accomplish with this product?
- [04:39]
Ben Carlson
Well, I mean Michael, as you said, we use free cash flow margin. And so for those who don't know what free cash flow margin is, it's the free cash flow company generates divided by sales. So it's a measurement of how successful a company is in converting their sales and revenues into excess free cash flow. And we like free cash flow as the metric because it's something that you really can't mess with if you will earnings and things like that can be sort of manipulated. Free cash flow is the money that's left over after a company's paid all of its bills. It's very, very hard to manipulate. And so what we do is we use that as a screening mechanism. And what you were on to, like the reason Nvidia is such a great stock is their free cash flow margin is like 47%.
- [05:17]
Sean O'Hara
Is that good?
- [05:18]
Ben Carlson
That's huge. So for every 100 bucks in sales, they're generating $47 worth of free cash flow and they're able to plow that back into their business and continue to grow, number one. And number two, it's an indication that they're not really an asset heavy company, which can tend to weigh down companies over time. So we started focusing on free cash flow a decade ago on the value side. We've now transitioned on the growth side using free cash flow margin. And with QQQG, what we do is we take the NASDAQ 100 and sort of take it apart. The way people maybe traditionally know is it's cap weighted. I think the flaw in that is that you got seven companies that basically take up like 45 or 50% of the weight. So there's fantastic companies in the NASDAQ 100 that get underappreciated with regard to the allocation. We screen for the 50 companies with the highest free cash flow margin. And so what we're trying to do is identify that key metric that you talked about at the beginning, which is companies who are great at converting their sales into free cash flow.
- [06:16]
Michael Batnik
So I want to get into the investment process in a little bit, but I thought this would be a good jumping off point to talk about Palantir, which is a company a lot of people have been talking about lately. And some people just can't, are pulling their hair out saying this company has, this has to be the most overvalued company in the index. It's trading at like 70 times sales or something. If you look at a chunk 70. Michael did a chart last week that, that shows the. Well, I guess it depends. This is as I'm sure what they did at 70. So anyway, Michael had a chart showing Coca Cola's market cap over time. And Palantir has caught it in like the last two years, essentially. It's crazy. And so you guys have it as I'm looking at Y charts for your top holdings as the second largest holding. So maybe you could explain how Palantir looks on a cash flow basis. Because it is funny, depending on what kind of valuation metric you use, how different these things can look to certain people.
- [07:07]
Ben Carlson
Well, they have a similar free cash flow margin to a name like Nvidia, for example. So they generate gobs and gobs of excess free cash flow. I agree that you make an argument the stock is probably overvalued, but we, we rebalance this portfolio on a quarterly basis, and we only use that one metric, which is essentially that free cash flow margin. The second thing, though, that we do is we momentum weight the portfolio. So I'm not necessarily going to have the highest free cash flow margin name at the top of my list. I'm going to use relative strength and momentum weight, which is why Palantir gets pulled up into that weight in the portfolio, which, by the way, is one of the things that distinguishes us from a return perspective to the NASDAQ 100.
- [07:46]
Sean O'Hara
Yeah, so when you say we momentum weight, are you talking about price or accelerating free cash flow margins?
- [07:51]
Ben Carlson
Price, purely price. So momentum's powerful when it's there. You want to make sure you take advantage of it. And the whole story about QQQG and all of this whole series that we have using free cash flow margin is to sort of move away from traditional cap weighting, which is, you know, the big elephant in the room is whether you look at the Russell 1000 growth or the NASDAQ or the growth, they all have the same similar characteristic. They all have a big overweight to seven names. And a vast majority of the portfolio is amongst those seven names. And so what we're trying to do is give people an opportunity to not own the companies maybe that have grown the most over the last 10 years, but maybe more weight in the portfolio to those companies like you mentioned, Palantir or Palo Alto or Applovin or fortnet, that are underrepresented in the broad index just because they're cap weighted.
- [08:39]
Michael Batnik
So how do you do, when you do your quarterly rebalances, how do you weight the portfolio? Is it evenly weighted or.
- [08:45]
Ben Carlson
No, we momentum weight the portfolio. So we pick the 50 stocks with the highest free cash flow margin and we run that momentum screen on top of that. So there's 50 names always in the portfolio. They all come out of the NASDAQ 100. And then each company's given a weight in the portfolio based on their momentum or their relative strength score, but everything's capped at 5%. So I don't want to have 20% in a name. I don't want to have 15% in a name. So if I got A company that would normally, just because of its momentum score, garner a 12% weight, I'm going to take that 7% excess weight and sort of trickle it down the rest of the portfolio.
- [09:18]
Sean O'Hara
So you mentioned that cap weighting has been the elephant in the room. I think the top what the top seven stocks are 35% of the S and P and even larger percentage of the NASDAQ 100. So why did you choose free cash flow as the thing to benchmark against? Why not? I don't know anything else. What's so special about free cash flow that you think is going to filter its way to the bottom line of the share price?
- [09:46]
Ben Carlson
Well, because when you think about growth, you know, if you look at a broad index like the Russell Growth, for example, one of the things they'll factor into what goes into that index is sales growth. And sales growth everybody thinks is a great thing, it's a good thing until there's not any profits. And you know, the poster child for that would be Peloton, right? And I love Peloton. I own two of their bikes, I'm a cyclist. It's a great product. But during the pandemic when we were all locked in our houses wearing masks amongst our families, you know, that stock went crazy because everybody sort of extrapolated that sales number into the future and thought eventually they'll be profitable. Well, we don't think that that's a very good long term measure of success. As a matter of fact, if you just focus on sales growth, you actually destroy alpha. When you look at free cash flow margin and you look at the top decile or quintile nat in any index that have the highest free cash flow margin, they add 3 to 5% per year in excess return versus their broad benchmark. And so we stumbled on free cash flow a decade ago and we applied it to value using free cash flow yield. That would be the original Cash cow series that we had. We've now sort of went back to the. Well, if you will, we use the same research folks, we outsourced that to a company called Empirical. I think they're one of the smartest people I've known in 40 years in this business. And we asked them the same simple question. If we're going to do growth, but we're not going to use traditional growth metrics, should we use, they said use free cash flow margin. So that's how we got here.
- [11:05]
Sean O'Hara
So people might say, might look at some of these names in this portfolio and say, oh my goodness, how could you possibly Buy a stock trading at 100 times trailing, 70 times forward, whatever the case may be. And you would say, well, markets aren't dumb, dummy. There's a reason why these companies are richly valued. It's because they are gushing cash and investors value that over everything else.
- [11:25]
Ben Carlson
Yeah, I mean you could have made the argument, the same argument against Nvidia four or five years ago. You would have missed out on an enormous amount of excess return. And Nvidia will eventually slow down, as we think Palantir will. But by rebalancing the portfolio, we're always looking for those next names. You know, some of the names that are not in this portfolio, Amazon, Tesla and Costco, which are big holdings, they're all top 10 holdings in the NASDAQ 100. I mean, Amazon's free cash flow margin is single digits. And so, you know, I'm not looking for a name like Amazon who's generating single digit digits excess free cash flow because I want companies with 30% or more excess free cash flow because I think they'll be able to convert that free cash flow into continued sales. We also get the excess return by overweighting names and underweighting names. Right. So we own Nvidia, we own Google, we own Apple, and we own Meta. But they're not, those five stocks are not 25% of the portfolio. They're probably collectively less than about 11% of the portfolio. The names on the overweight side are Palantir, Palo Alto, Applovin, which is a phenomenal stock, and Fortinet. But the way these broad indexes work is that because their market cap weighted, those giant trillion dollar companies squeeze out investors from allocating to these other companies. You get way underrepresented in these other great growing companies like Apple Oven for example, I think is up more than Nvidia. And so you're missing out on opportunities by focusing on cap weighting and what free cash flow margin does and using it as a screen and then only picking 50 stocks gives you that exposure to these names that are way, way, way under what underweighted in the broad index.
- [12:59]
Michael Batnik
So I guess if I had to really simplify your strategy in a one sentence, it would just be that you're, you're buying these tech stocks that produce a lot of free cash flow, but they're also going up. So how much, how important is that momentum screen in all of this? And does that, I assume that just has to increase the turnover because I can't imagine the free cash flow margins change all that much over time.
- [13:18]
Sean O'Hara
And Sean, just to jump in a follow up or an additional question on that point, it's like, what would happen when the stocks are going down? How would you, how would you factor in momentum when there's negative momentum?
- [13:27]
Ben Carlson
I mean, the momentum score is really, really important. Right. So growth is different than value investing. Value investing is like, what's the stock worth today? And can I make a case that it's way undervalued? Right.
- [13:37]
Sean O'Hara
No.
- [13:38]
Ben Carlson
Okay. Growth investing is looking forward. Right. But there's two different distinct growth regimes that I think we see. Right. One is when everything's great and everybody's making a lot of money, the economy is humming, and you can make a good case for growth. The other is when you have multiple expansion, which is what we've had for the last couple years up until the beginning of this year. Right. And if you don't pay attention to that multiple expansion, which is the momentum play, you miss out a great deal. And so that's why we do, what we do is that we want to be momentum weighted, but we want this fundamental that we believe in so much, which is free cash flow margin. But you have to sort of play both sides of the street as a growth investor.
- [14:17]
Sean O'Hara
Getting back to the question about, like how, how would you think about momentum, price momentum, when stocks are falling, would it be like the ones that are falling the least would have, yeah, I guess, relatively the highest momentum?
- [14:26]
Ben Carlson
Yeah, it's just a relative screen versus the other 50 names, you know.
- [14:29]
Sean O'Hara
So, okay, so looking at the free cash flow margin comparison, your companies or the companies in this portfolio weighted by, I guess the weighting is 28% versus 22% for the NASDAQ 100, give or take. Is there empirical evidence, I guess looking backwards, because we don't have, we don't have. What's the opposite of a back test, a front test? Do high free cash flow companies correlate with higher performance?
- [14:53]
Ben Carlson
The answer is in the research that we've seen and we get it from empirical research. So it's just funny that you said empirical because there's two different ways to use that word. One is the way you used it and the other is the name of the research firm, is that there is ample evidence that really going back for decades, if you will, that this free cash flow is a super metric and it can be applied a number of different ways to identify companies that have better, potentially better long term growth prospects. We launched a similar product almost three years ago, COWG, which uses the Russell 1000, and it pulls out the 100 stocks with the highest free cash flow margin. And it's beating the Nasdaq and it's beating the Russell growth pretty handily, like double the last 12 months. And it's for the very same reason that QQQG works, and that is that we're underweighting those mega cap names and we're overweighting those next companies who potentially have the opportunity to be the real superstars.
- [15:51]
Michael Batnik
So you've done a lot of historical work on this. JP Morgan's Michael Semblas did this chart a few months ago where he looked at the free cash flow margins of the 10 biggest firms in the S and P by decades. And in the 70s and 80s it was relatively low, call it under 10%. And it's, it's gone up about 5% per decade since then, where now it's approaching 30%. And it seems to me like this is just something that we've never seen before. Do you find that the companies from today are just that much better at producing cash flow than even your historical back test show?
- [16:24]
Ben Carlson
Well, I mean, I think, you know, Ben, the market's really different today. If I went back to the 70s and I said, how do we value stocks? Like 90% of the value of a stock in the, in the 70s was based on their price to book and only 10% on intangible assets. Right. You know, those are things you can't see, touch, feel, pick up or put a price tag on. Today it's the other way around. It's 90% intangible assets and only 10% tangible. So the world changed. Right. So it wouldn't surprise me if you went back and look at the 70s, 80s and 90s that the constituents would change a great deal. Tech and this current movement that we're going through with AI, I think it's a transformational period and I think there's going to be massive winners in this space, but it's not going to be limited to just seven stocks. There's a lot of really great names in the Nasdaq 100, for example, or the Russell Growth that just get underrepresented. And so it's not a surprise to me that we have much higher free cash flow margins, for example, today than we did say 20 years ago.
- [17:22]
Sean O'Hara
How do you or how are people thinking about when you talk to advisors or end users or empirical how might AI impact free cash flow margins? I think a lot of people are looking forward to higher productivity gains, ostensibly higher free cash flow margins. But what if it's the case that some of the AI companies that are coming to market, some of the incumbents just destroy these companies.
- [17:46]
Ben Carlson
I don't know that they're going to destroy these companies. I think what they're going to do is enhance their capabilities. I mean there's two different distinct ways to think about AI. Right. One is the folks that are embedded in the, the large language models and AI learning. But then it's the application case for companies that you wouldn't think are necessarily AI companies which will help to increase their productivity. So I don't think it's going to destroy companies. I think it's going to make them far more productive over time.
- [18:13]
Sean O'Hara
So how about this, and maybe we're getting too far in the weeds, but looking at the site, free cash flow, the definition and more. This has given me PTSD flashbacks to the CFA material. A company's cash flow from operations minus capital expenditures, expenses, interest, taxes and long term investments. Okay. On the CapEx side, there are, I was reading in Barron's over the weekend, Oracle is spending like, I don't know, 40% its CapEx of its revenue on CapEx or some crazy number. So I guess your answer would just be, well, okay, well then higher capex, lower free cash margins, lower weighting the portfolio.
- [18:45]
Ben Carlson
Yeah. And we'll wait to see whether that excess capex is going to turn into real money. Right. You know, the best example over the last five years would be the energy companies. I mean they slashed their capex massively, oil prices spiked and so they are generating gobs and gobs of excess free cash flow. And so we've got a few energy names in our growth product using the Russell 1000, but that cycle will change as well. I think the big energy companies are going to sort of, you know, pull in their horns a little bit in terms of being really, really aggressive and but they're going to shift. I think the energy stocks are going to be, they're the only people I think that can solve this quote unquote green energy problem. And we need everything, right? We need oil and gas, we need coal, but we need other stuff. And so they're going to take their capex probably at some point start investing more heavily into non traditional energy production.
- [19:37]
Sean O'Hara
You should market this as a wait and see approach to AI investing. Well, you like it?
- [19:41]
Ben Carlson
It's sort of like the proof is in the pudding at the end of the day. Right. I don't own any companies that generate less the 50 best, you know, free cash flow margin generators.
- [19:51]
Sean O'Hara
So there you go. All right, so We've spent, we spent the majority of this conversation so far talking about technology companies because they are the natural winner in terms of operating leverage, higher margins, higher free cash flow. But then industrials are an 11 weighting as of 331, 20, 25, healthcare, almost 10%. How are some of the other companies? And it's funny because we've spoken about this a lot in the NASDAQ 100, like you mentioned, Costco, I believe Pepsi is in there. I think there's an airline in there. It is not only technology stocks or communication services. So how are industrials able, or whatever sector you want to talk about, able to generate so much free cash flow?
- [20:35]
Ben Carlson
Well, if you take the healthcare names, it would be probably sort of the drug makers that would fit into that category, right? If they hit big on a drug, they're going to generate huge amounts of excess free cash flow. As a specific example, I'm just trying to get my list of names up here so I can see if I can pick an industrial for you guys to take a look at. But at the end of the day, we're very simplistic and very straightforward. It's 100% rules based. I don't care what sector they're in, I don't even care what their name is. What I care about is do they generate enough excess free cash flow margin compared to everybody else And I want to give them excess weight in my portfolio.
- [21:11]
Michael Batnik
I am a big proponent of the simplicity and less is more. And it seems like the rules for this strategy are very simple and straightforward. And it's funny because a lot of times a lot of these quantitative strategies will be more in the weeds and more detail oriented. And sometimes it seems like the end investor wants that complexity. It makes them feel it's easier sales pitch. I'm just curious how the advisors you're talking to or the retail investors, institutional investors, how comfortable they are with this process being that it is relatively straightforward and simple and easy to understand.
- [21:42]
Ben Carlson
Well, I think most of them deal with business owners to a great degree. And if you're a business owner, you understand free cash flow implicitly, right? If you don't have free cash flow, you're dead. That's number one. Number two is before we bring anything to market, right, we have the liberty of going back and running a whole bunch of scenarios, right? So I can run, you know, cap weightings, I can run different weighting schemes, I can run rebalances and I can put additional rules. And what we found, to be honest, Ben, is that the fewer inputs that you import into something like an index methodology, like what we've put together here, the fewer the better, the more complex you make it, you just water it down. And so either you believe having a high free cash flow margin is a good thing and you believe that over time that might lead to higher excess returns, or you don't. But the data that we have, and so far, you know, short track record, almost three years on the Russell side and a shorter track record here. But you know, I think we believe implicitly that we're, we're in the right place here.
- [22:42]
Sean O'Hara
One of the great things about the ETF wrapper is that it allows you for systematic investing and particularly on the free cash flow side, this is not generally a metric that you could just find on the Internet at Yahoo. Maybe it's there, maybe it's not, I don't know. But this is something that is, that is a pain in the A to calculate. And the fact that you are able to have a quantitative rules based approach inside of a tax efficient vehicle, just doing this on your behalf, it's pretty incredible. I think we take it for granted often.
- [23:10]
Ben Carlson
Yeah, I mean we can rebalance the portfolio without having to worry about, you know, like on the value side. For example, I remember we owned Meta one time for like a quarter, it was up 90%. Now we sold it because the stock price went up which meant its free cash flow yield went down. But I don't have that normal decision making process that a traditional 40 act mutual fund manager would have which is, you know, if I sell this stock, I'm going to distribute big capital gains and my shareholders won't like that. ETFs allow you to rebalance on a quarterly basis, for example, like we do with most of our stuff, and not have to worry about that capital gain distribution at the end of the year. Because of what's called custom in kind creation redemption, we're able to rebalance using that tactic. The other thing that you mentioned, free cash flow and those kinds of things, if you have a fact subscription you can find it. But the average person on the street trying to do the research on something like this themselves, it's fairly difficult. And so this is just a different way to get into a story that we believe makes sense and that we think other people agree with us, that it makes sense over time where you don't have to be like you have your head in your computer all day long trying to run stocks, free cash flow margins.
- [24:19]
Michael Batnik
Obviously this is a more concentrated strategy with 50 names from a portfolio management perspective, do you view this as more of a satellite type approach where you have the building block of the S&P 500 or the total US stock market or the NASDAQ 100? And this is sort offshoot of that?
- [24:36]
Ben Carlson
You know, the way we try to position this is that, you know, beta is free essentially, right? You can give beta exposures to all kinds of indexes for nothing. And that makes sense, right? But what we think is this is a complimentary position to traditional beta where you can put something in the portfolio that works differently and is constructed differently that we hope over time will add to the excess returns. It's no fun just getting the market's return, right? You want to beat it over time. So this gives you a tool, if you're a financial advisor, to add something that will create true diversification in your growth sleeve, for example, without looking like what everybody else does. Because if you look at growth managers today, if they're not overweight, the Mag 7, they're in big trouble. So they look very much like traditional closet indexers, if you want to know the truth. This is not closet indexing. This is decidedly different. And so it gives that financial advisor and their client a tool that they can add to sort of move away from what I think is the elephant in the room, which is I think these seven stocks control everything and they're not necessarily going to be the whole story over time. There are many, many, many high quality companies that have far, we think far greater growth potential than the Mag 7 do.
- [25:46]
Sean O'Hara
I think sometimes portfolio managers have the tendency to overdo things because complexity sells. As we mentioned earlier, are there things that you look at outside of price momentum and free cash flow?
- [25:58]
Ben Carlson
Not on this particular product, no. And on the value side, we look at free cash flow yield and we weight by free cash flow dollars. And so we sort of are the anti market cap weighting story, which we also think makes sense over time. It's not traditional equal weight, but by not being tied to that quote unquote market cap scheme, you leave lots and lots of room in your portfolio for other names that are going to get squeezed out or won't get enough weight in the portfolio to mean anything.
- [26:25]
Sean O'Hara
You mentioned. That's a, that's also a good one. Anti market cap. I'm looking at this real quick. Do we have a. Oh, here we go. We didn't have a market cap. All right. Holy cow, this is wild. Am I reading this right? The weighted average market. Okay, so the weighted average market cap in millions. Oh, God, don't make me do math. I'm not going to do it. I'm not going to do it.
- [26:44]
Ben Carlson
Just say the first three numbers.
- [26:47]
Sean O'Hara
I can't. There's seven numbers. It threw me off. Let's just say this, this.
- [26:51]
Ben Carlson
I got it, I got it, I got it. Hold on.
- [26:54]
Sean O'Hara
I've never seen millions and millions. Is this, is this 10 billion? I won't even try. Don't, don't fact check me. But the point is this. The weighted average market cap is about a quarter the size of the NASDAQ 100. So you're right. This is, this is, this is significantly different. Now, listen, I'm guessing it's a higher beta. Smaller companies tend to have higher betas. But it is different than the NASDAQ 100 for sure.
- [27:17]
Ben Carlson
Yes. And it's driven by two things. One is, you know, we have a much bigger weight, for example, to applov, and then the NASDAQ 100 does, and we have a much lower weight to, let's say Nvidia. We own Nvidia, but it's a lower weight. Right. And when you think about, you know, average weighted market cap, you know, it gets skewed in a traditional index because, you know, the five companies that are all over, seven companies, over a trillion dollars in market cap. When you do what we do and you don't use market cap as your screen, you use something else, then you're automatically going to tamp it down. The example I would give people is that I think the weighted market cap of The S&P 500 is north of $500 billion today, but the equal weighted version of it is like 110 billion. So they're the same 500 stocks. There's just a different weighting scheme. So we're not the same stocks. But that'll give you an idea how to think about that, if you will.
- [28:06]
Michael Batnik
So people have been worried about valuations in tech stocks, it seems like, for, I don't know, seven to ten years or so. Do you have any concerns about these stocks, the fact that they've gone up so much, or do you just kind of say, listen, we're playing by the rules here and following the fundamentals and stocks that are going up and, and the, whatever stocks do from there, it's up to them.
- [28:28]
Ben Carlson
We think that, you know, that's the way to do it. If you, if you have companies are generating lots and lots of sales, are generating lots and lots of excess free cash flow, we think that's a good thing. What the market will put on it as a multiple. You know, that's up to the market. You know, that's just sort of the way things work. But over time, you know, by rebalancing, we always have a fresh look at the 50 stocks in QQQG as an example, that have free cash flow margin. So as somebody gets big enough, let's say, and their free cash flow margin starts to shrink a little bit, then I want to replace them with somebody who's got a higher free cash flow margin down the road.
- [29:01]
Michael Batnik
Okay, Sean, for anyone who's listening, wants to learn more about I got the Name Michael Pacer, NASDAQ 100 Top 50 Cash Cows, Growth Leaders ETF. That's QQQG.
- [29:10]
Ben Carlson
That's the SQL.
- [29:10]
Michael Batnik
If anyone wants to learn more, where do we.
- [29:12]
Ben Carlson
That's the SEC's fault because the naming conventions today are so ridiculous that, you know, like, we have to fight about names. You'd be easier to call it something.
- [29:20]
Michael Batnik
Shorter, but so you have to be very explicit. Is that the thing they're talking about?
- [29:24]
Ben Carlson
Truth and labeling.
- [29:25]
Michael Batnik
Okay, so if anyone wants to learn more about this product, where do we send them?
- [29:28]
Ben Carlson
Pacerychefs.com Order your financial advisor.
- [29:32]
Michael Batnik
All right, thanks very much, Sean. Okay, thanks to Sean. Remember, check the out pacer etfs.com to learn more, email us animalspiritscompoundnews.com.