Corporate bond investing has long lived and died by the credit rating. For decades, advisors building the fixed income sleeve of a client portfolio have largely outsourced their quality judgment to Moody’s Ratings and S&P Global Ratings, accepting the lower yields that come with higher ratings as the price of safety. Pacer ETFs has created what the firm believes is a better screen—one rooted in the same free cash flow methodology that has made the firm’s equity lineup a standout.
Enter the Pacer US Cash Cows Bond ETF (ticker: MILK). The ticker is a deliberate nod to the firm’s Cash Cows equity franchise: just as a cow produces milk, a free-cash-flow-generating company produces the income and financial strength needed to service its debt. The fund, which launched in December 2024 and trades on Cboe, seeks to track the total return potential, before fees and expenses, of the Solactive Pacer US Cash Cows Bond Index. Sean O’Hara, President at Pacer ETF Distributors, walked through the strategy in a recent interview with The Wealth Advisor’s Scott Martin—and the construction logic is more rigorous than the playful branding might suggest.
A Different Kind of Credit Analysis
The core premise behind MILK is that free cash flow is an honest signal of creditworthiness that captures more than a letter rating. Traditional fixed income ETFs screen heavily on credit ratings, but O’Hara argues the spread between investment-grade and lower-rated debt doesn’t adequately compensate investors for the risk in today’s market.
Instead of relying on rating agencies, the firm uses the constituents of two of its equity ETFs—the Pacer US Cash Cows 100 Index (for COWZ), which screens for free cash flow yield, and the Pacer US Large Cap Cash Cows Growth Leaders Index (for COWG), which targets above-average free cash flow margin—as the eligible universe for the bond portfolio.
“We don’t really have a focus on the traditional metrics like what are the credit ratings of the underliers,” O’Hara explains. “I don’t necessarily think that you’re getting paid today to avoid the risk in some of these areas because the differential is pretty wide.”
The logic follows the same reasoning a bank would apply to any borrower. If a client walks in asking for a loan, the bank pulls income statements and balance sheets, not a Yelp review. Pacer’s approach aims to replicate that underwriting discipline at scale—each bond in MILK’s portfolio must come from an issuer that has already cleared the free cash flow hurdle required to land in COWZ or COWG. From there, the portfolio is optimized for yield to maturity and duration.
“We put the portfolio together of constituents of the underlying corporate bonds of the COWZ and COWG holdings,” says O’Hara. “So, we know going into this, whatever S&P says the bond should be rated, we know that the company has an excess of free cash flow.”
What the Metrics Show
Beyond the free cash flow screen, Pacer runs two additional checks: debt-to-equity ratios and the percentage of EBITDA (earnings before income, taxes, depreciation, and amortization) used to cover debt service. The companies that have sufficiently high quality for inclusion in MILK tend to sit at the more conservative end of both measures—meaning they carry less leverage relative to equity, and they’re not burning a disproportionate share of earnings just to keep up with interest payments. O’Hara’s point is that companies scoring well on both dimensions should, in theory, command the highest bond ratings. In practice, they often don’t, which is where the yield opportunity opens up.
As of March 31, 2026, the fund held bonds from 49 companies across 102 issues. The weighted average coupon sat at 5.35%, average years to maturity at 13.11, and yield to maturity at 6.13%. MILK aims to deliver about 150 basis points of excess yield over a broad bond benchmark such as the Vanguard Total Bond Market ETF (BND), which may yield 4% or below—and the fund’s current figures bear that out. The fund pays distributions monthly.
MILK does carry some bonds that fall below investment grade on the traditional rating scale, but O’Hara sees the rating agencies’ classifications as missing the bigger picture on the underlying issuers’ financial health. The letter on a bond, in his view, tells you far less than what’s on the issuer’s balance sheet.
“There’ll be some bonds that are rated by the big rating agencies below that ‘investment grade,’” he says. “But you’re talking about names, again, that have excess free cash flow and generate gobs and gobs of that and then generally have less debt to equity. And they use less of their earnings to cover their debt service.”
The potential yield pickup, then, is less about taking on lower-quality credits and more about applying a different definition of quality altogether. “We’re trying to stretch for a little extra yield here, and we’re trying to deliver a little extra yield here by using a completely different approach, which is to not necessarily lump things together based on what Moody’s or S&P says their bonds should be rated, but by their ability to repay the debt and to cover the debt service,” O’Hara emphasizes.
The Dynamic That Keeps the Portfolio Honest
One of the more underappreciated features of the strategy is its built-in self-correction mechanism. Because MILK draws from the COWZ and COWG universes, any issuer whose free cash flow deteriorates enough to screen out of the parent equity indexes is removed from the eligible bond universe at the next annual reconstitution. A company that issues bonds and then watches its cash flow erode—perhaps because debt service is eating into operating income—will cycle out of the portfolio before conditions become severe.
“They’ll wind up screening out of COWZ in COWG when somebody else will screen back in,” notes O’Hara. “So, there’s a constant reupdating of the portfolio every year. If somebody’s cash flow deteriorates dramatically, we’ll rebalance that name out of the portfolio and we’ll replace them with somebody that has the highest free cash flow or free cash flow yield or the highest free cash flow margin.”
The annual cadence limits how stale the quality screen can become. Advisors building income-generating portfolios for clients get ongoing exposure to companies in strong financial shape—not a static snapshot of who looked good at launch.
Got MILK?
O’Hara is deliberate about how MILK is positioned relative to a broader fixed income allocation. The fund isn’t meant to replace a core bond position; it’s designed to enhance existing exposure. The Federal Reserve has begun pulling rates down from their peak, money market yields have retreated from about 5% to 3% or below, and the real return on the highest-rated fixed income has narrowed considerably with inflation still running near 2.7–2.8%.
Against that backdrop, O’Hara thinks the calculus for income-seeking investors is changing. “There’s going to have to be a shift here,” he says. “If you want to get higher yields, then you need to find smart ways to do that.”
For Pacer, MILK offers advisors potential to transition without abandoning quality. The strategy is built to slot into a fixed income allocation—not upend one—aiming to offer a higher-yielding alternative to the portion of a portfolio that has largely been deadweight in a higher-inflation environment.
“Where we think it fits in a portfolio is it should be an add-on to your fixed income,” says O’Hara. “We’re never in the business of saying, ‘Hey, get rid of everything you have and give it to us.’ But if you have 40% of your money in fixed income, there should be a little sleeve of this in there to try to boost the overall yield of that part of the portfolio.”
With core bond exposure generating 3–3.5%, the math on real returns gets uncomfortable fast. “The real return on the highest-quality-rated fixed income securities is not very high,” he points out. “Here, you can generate some excess real return by getting almost 6% on your portfolio.”
For advisors whose clients have been frustrated by the yield on their bond allocations over the past several years, MILK aims to provide an opportunity to meaningfully improve income generation without migrating into a pure high-yield strategy. The free cash flow screen keeps the portfolio anchored to companies with bona fide debt repayment capacity, making the yield pickup a function of a different analytical framework rather than an outright quality trade-down.
Additional Resources
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Disclosures
Before investing you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. This and other information is in the prospectus. A copy may be obtained by visiting www.paceretfs.com or calling 1-877-337-0500. Please read the prospectus carefully before investing.
An investment in the Funds is subject to investment risk, including the possible loss of principal. Pacer ETF shares may be bought and sold on an exchange through a brokerage account. Brokerage commissions and ETF expenses will reduce investment returns. There can be no assurance that an active trading market for ETF shares will be developed or maintained. The risks associated with this fund are detailed in the prospectus and could include factors such as calculation methodology risk, concentration risk, ETF risks, fixed income risk, government obligations risk, high yield risk, limited operating history, management risk, non-diversification risk, passive investment risk, sector risk, tracking error risk, and/or special risks of exchange traded funds.
The financial instrument is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade mark or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG.
Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade mark for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.
Weighted Average Coupon is the average gross interest rate of the underlying mortgages in a mortgage-backed security at the time it was issued.
Average Years to Maturity is the calculated average time it takes for all the debt securities within a portfolio to reach their maturity date.
Modified Duration is a calculation that estimates how much a bond’s price will change in response to a 1% change in interest rates.
Yield to Maturity is the annual rate of return an investor can expect from a bond if they hold it until maturity and reinvest all interest payments at the same rate.
The Solactive Pacer US Cash Cows Bond Index was released on 12/13/24.
Vident Advisory, LLC d/b/a Vident Asset Management (“VA” or the “Sub-Adviser”) serves as investment sub-adviser to the Fund.
Cash Cows Index® is a registered trademark of Index Design Group, LLC.
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Not FDIC Insured May Lose Value Not Bank Guaranteed
Distributor: Pacer Financial, Inc., member FINRA, SIPC, an affiliate of Pacer Advisors, Inc.
