Recently, research analysts at Bank of America Corp. (ticker: BAC) published what they described as a “generational transfer in free cash flow,” charting the trailing 12-month free cash flow of AI hyperscalers against semiconductor companies from 2007 through projected 2027.
The chart highlights a sharp inflection point beginning around 2026, with free cash flow at the hyperscalers turning deeply negative while semiconductor manufacturers continue generating substantial cash surpluses. The reason comes down to where money is flowing across the AI value chain.
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The largest cloud providers are spending unprecedented amounts on data centers, networking equipment and AI accelerators, causing capital expenditures to surge. Semiconductor companies, by contrast, are currently collecting much of that spending through booming demand for graphics processors, networking chips and memory.
“There seem to be more articles appearing each week questioning the accounting we are seeing related to the AI trade,” says Thomas Cole, co-founder at Distillate Capital Partners. “The depreciable lives of the chips and data centers is being debated, and estimates for future profitability are all over the map.”
Unlike many accounting metrics that adjust or exclude certain expenses, free cash flow reflects the balance ultimately available to repay debt, repurchase shares, pay dividends or reinvest in future growth.
“Earnings often include non-cash charges such as depreciation and stock-based compensation, which are classified as expenses, but may not reflect true cash outflows in a given period,” explains Mark Andraos, partner and wealth advisor at Regency Wealth Management. “Furthermore, a company may hold a passive interest in a separate entity, which may change in value and flow through net income, but may be unrelated to the company’s core business operations.”
After all, when investors buy a stock, they are purchasing an ownership stake in a business, and the long-term value of that business ultimately depends on the cash it can generate for its owners.
“Companies with high free cash flow have several qualities in common,” says Sean O’Hara, president at Pacer ETFs Distributors. “They generate better earnings growth than traditional value metrics, they have lower debt to equity, and they utilize a smaller percentage of earnings to cover interest expenses.”
Investors looking to emphasize companies with strong free cash flow have several exchange-traded fund, or ETF, options. Some use active management to identify businesses with attractive cash generation, while others apply transparent, rules-based screens to build portfolios around the free cash flow factor.
Here are seven of the best ETFs for investing in high free cash flow stocks:
| ETF | Expense Ratio |
| Distillate U.S. Fundamental Stability & Value ETF (DSTL) | 0.39% |
| Distillate International Fundamental Stability & Value ETF (DSTX) | 0.55% |
| Distillate Small/Mid Cash Flow ETF (DSMC) | 0.55% |
| Pacer US Cash Cows 100 ETF (COWZ) | 0.49% |
| Pacer US Large Cap Cash Cows Growth Leaders ETF (COWG) | 0.49% |
| VictoryShares Free Cash Flow ETF (VFLO) | 0.39% |
| Invesco Nasdaq Free Cash Flow Achievers ETF (QOWZ) | 0.39% |
Distillate U.S. Fundamental Stability & Value ETF (DSTL)
“The market is asking more questions about the underlying cash impacts, and why these seemingly very profitable AI businesses are in need of debt financing,” Cole explains. “These are among the issues that we see that cause us to rely on free cash flow as a better metric by which to assess valuations.” Distillate Capital’s flagship free cash flow ETF is DSTL, which charges a 0.39% expense ratio.
Rather than tracking an index, the actively managed fund begins with a universe of 500 profitable large-cap U.S. companies, screened for low debt levels and stable cash flows. It then applies Distillate Capital’s proprietary free cash flow valuation methodology to select the 100 most attractively valued stocks, weighting them by free cash flow generation and rebalancing the portfolio quarterly.
Distillate International Fundamental Stability & Value ETF (DSTX)
Free cash flow is a useful valuation metric across international markets because it is less affected by differences in accounting standards than many earnings-based measures. That makes it easier to compare businesses across countries using a common framework. For investors seeking international exposure, Distillate Capital offers DSTX, which applies a methodology similar to DSTL.
One challenge with rules-based international free cash flow screens today is that they can become heavily concentrated in semiconductor companies such as Samsung Electronics Co. Ltd. (005930.KS) and SK hynix Inc. (SKHY), whose free cash flow has surged alongside the AI buildout. DSTX’s active approach largely avoids that concentration, instead emphasizing more value-oriented companies.
Distillate Small/Mid Cash Flow ETF (DSMC)
“An overlooked risk is that a free cash flow screen can become crowded,” says Michael Ashley Schulman, partner at Cerity Partners. “Once everyone piles into the same handful of cash-rich companies, investors can end up paying luxury prices for businesses that were supposed to represent value.” Investors can potentially sidestep this concern by screening for free cash flow in less popular segments of the market.
DSMC extends Distillate Capital’s proprietary free cash flow methodology to small- and mid-cap stocks. Free cash flow is particularly valuable in this segment because broad small-cap indexes such as the Russell 2000 contain many unprofitable “zombie” companies that rely on repeated borrowing or equity issuance to fund operations. Requiring strong free cash flow can naturally screen out those stocks.
[SEE: 7 Best Growth ETFs to Buy in 2026]
Pacer US Cash Cows 100 ETF (COWZ)
Investors who prefer a passive, rules-based approach instead of active management may find COWZ appealing. With approximately $18 billion in assets under management, it is one of the largest ETFs built around the free cash flow factor. The fund starts with the Russell 1000 Index before screening companies by trailing 12-month free cash flow yield. The top 100 companies are weighted by free cash flow yield.
According to Pacer, the benchmark tracked by COWZ had a 6% free cash flow yield as of March 2026, compared with 2.6% for the Russell 1000 index. It also traded at a lower 18 times price-to-earnings ratio versus 26 times for the Russell 1000 index. Sector overweights for COWZ currently include a 19.7% allocation to healthcare and 11.6% in energy. The ETF charges a 0.49% expense ratio.
Pacer US Large Cap Cash Cows Growth Leaders ETF (COWG)
“Traditional growth indexes rely on sales growth, but this can be a trap because sales are no good unless they translate into profits,” O’Hara explains. “Conversely, free cash flow margin is a measure that calculates how effectively companies convert sales to free cash flow.” This metric is the driver behind COWG, which screens for the 100 highest free cash flow margin companies on a 12-month trailing basis.
From there, COWG also applies a price momentum score to weight its holdings, up to a 5% cap. Compared to COWZ’s more mid-cap value focus, COWG skews more mid-cap growth with a 57.4% technology sector tilt. According to Morningstar, COWG has beaten the majority of its 458 peer category funds on a risk-adjusted basis, earning a five-star rating. The ETF also charges a 0.49% expense ratio.
VictoryShares Free Cash Flow ETF (VFLO)
“Another overlooked consideration is that free cash flow can be cyclical; energy producers, industrial companies and commodity businesses may look like cash generating machines near the top of a cycle, only to see that cash evaporate when conditions reverse,” Schulman explains. Some more advanced index-based free cash flow ETFs like VFLO use a more forward-looking screen to mitigate this risk.
VFLO combines 12-month free cash flow with analyst estimates for the next 12 months to calculate an expected free cash flow figure. That value is then divided by a company’s enterprise value to produce an expected free cash flow yield. This methodology has produced strong results, with VFLO delivering a 23.3% annualized total return over the trailing three years versus 17.8% for the Russell 1000 Value Index.
Invesco Nasdaq Free Cash Flow Achievers ETF (QOWZ)
“Consistent free cash flow growth can be a sign of attractive quality characteristics, including strong profitability, operational efficiency and the ability to generate cash beyond the needs of the business,” explains Chris Dahlin, senior factor and core equity ETF strategist at Invesco. “Companies with growing free cash flow also have greater flexibility to return capital to shareholders through dividends and buybacks.”
QOWZ demonstrates that free cash flow screens can be applied to a variety of underlying benchmarks. The ETF begins with the Nasdaq US Benchmark Index before requiring companies to have generated positive free cash flow in each of the past 11 years. The portfolio is rebalanced quarterly and reconstituted annually each June, when eligible companies are added or removed.
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7 Best ETFs for Investing in High Free Cash Flow Stocks originally appeared on usnews.com
