Advisors seeking a smarter approach to growth investing face a frustrating reality: traditional growth benchmarks have become prisoner to a handful of mega-cap tech names. As of May, the Magnificent Seven represented nearly 50% of the Russell 1000 Growth Index weight despite comprising just 1.7% of its holdings. When these giants stumble, entire portfolios feel the pain.
Against this backdrop, Pacer ETFs offers its US Large Cap Cash Cows Growth Leaders ETF (ticker: COWG), which takes a different path, screening the Russell 1000 for the 100 companies with the highest free cash flow margins, prioritizing real profitability over market hype. In an interview with The Wealth Advisor’s Scott Martin, Sean O’Hara, President at Pacer ETF Distributors, discussed how COWG redefines growth investing by emphasizing operational efficiency and strong profitability metrics—factors that are increasingly relevant in today’s volatile market.
Why Free Cash Flow Margin Matters More Than Hype
COWG selects 100 companies from the Russell 1000 that rank highest by free cash flow margin. Free cash flow margin—free cash flow divided by revenue—identifies companies that not only generate strong top-line numbers but also efficiently convert revenue into available cash.
“They’re all profitable,” O’Hara says. “What’s also interesting about them is they have less debt to EBITDA and they use less debt, less of their earnings to finance debt, so they’re less levered.”
The screen favors companies that can reinvest heavily in their growth while maintaining financial discipline—an approach that might resonate with advisors looking for sustainability in client portfolios. The average free cash flow margin in the fund is more than 30%, says O’Hara. In contrast, many well-known growth names rely on optimistic projections and high spending to justify lofty valuations.
O’Hara points to a familiar cautionary tale: “The opposite of a good name for free cash flow margin would be Peloton. It was a darling of the pandemic, . . . but they could never sell enough to become profitable.”
The fundamental distinction between speculative growth and cash-generating growth sets COWG apart in an increasingly bifurcated market. While story stocks chase scale hoping to eventually achieve profitability, COWG’s holdings already demonstrate the ability to turn revenue into cash flow—a crucial advantage when capital is expensive and patience is thin.
Low Mag Seven Exposure, High Performance Potential
With mega-cap tech still dominating benchmarks such as the Nasdaq-100 and Russell 1000 Growth Index, many advisors are looking to reduce exposure to the sector’s outsize influence. COWG tackles this challenge head-on, aiming to offer a more diversified growth allocation that prioritizes cash flow—not market cap.
“One of the things we’re talking to advisors about these days is how to diversify that growth portfolio,” O’Hara says. “Let’s not just keep it weighted the same way it has been weighted.”
The COWG strategy holds only about 4% in the Magnificent Seven (typically, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla), and just 17% of its holdings overlap with the Russell 1000 Growth Index, O’Hara notes. The structure allows lesser-known but high-performing companies like AppLovin, Ubiquiti, and Astera Labs to play meaningful roles in the portfolio—names that would otherwise be buried under the weight of trillion-dollar tech firms.
AppLovin, the fund’s largest holding at 5.25%, has doubled its free cash flow year-over-year and continues to post margins above 50%. Palantir Technologies (5.22% of the portfolio) and Astera Labs (3.51%) similarly showcase the operational strength that often flies under the radar in cap-weighted strategies.
“AppLovin is not getting enough love in the broad indexes because it’s a great stock,” O’Hara says. “It’s up almost 500% the last 12 months, and people may not know that. Ubiquiti, same story. Texas Pacific Land, the same story.”
Other standout positions include CrowdStrike (2.26%), Ubiquiti (3.23%), DocuSign, and Texas Pacific Land—all companies that have posted impressive free cash flow gains or revenue growth. Each reflects the strategy’s focus on businesses converting strong revenues into real, recurring cash flow.
Diversified by Design
While information technology remains the largest allocation at 56.9%, COWG spreads its exposure across multiple sectors, including health care (13.4%), consumer discretionary (9.6%), communication services (5.5%), and energy (5.2%). The cross-sector balance gives advisors extensive access to growth opportunities without concentrating risk in any one corner of the market.
COWG’s methodology is sector agnostic, which allows it to find winners across the economy rather than clustering capital in tech. Recent portfolio standouts show how this plays out in practice. Texas Pacific Land benefits from a leasing model that cushions it from oil price volatility, while Ubiquiti plays a role in expanding global internet access. Both firms exemplify the strategy’s core principle: prioritize free cash flow, regardless of sector.
This diversification also seeks to mitigate risk, especially in an environment where sector rotations can happen quickly.
Year-to-Date Outperformance
In a flat or choppy market, returns matter. And COWG’s approach has delivered. The ETF is up just more than 7% year to date, outperforming both the Nasdaq-100 and the Russell 1000 Growth Index, which have both been largely flat.
The outperformance comes not from consistent exposure to companies with solid, real-world earnings, rather than betting on the next big story stock. “You’re getting better performance by being more diversified into smaller names,” O’Hara explains.
COWG’s methodology realigns capital toward names that deserve attention based on metrics—not headlines or market capitalization alone. The performance advantage stems from addressing a fundamental flaw in traditional indexing. Broad market indexes, he notes, tend to funnel most investable dollars into just a few names owing to their cap-weighted construction.
“Because their market caps are so huge, they just gobble up so much of the investible dollars in those indexes,” O’Hara says. “So, it leaves very little for everybody else.” COWG’s free cash flow margin screen is designed to counter that imbalance—shining a light on high-quality growth names that would otherwise be overlooked. “It’s working very, very well,” he adds.
Active Without the Closet Indexing
Most active growth managers talk about delivering differentiated returns, but many end up with portfolios that closely mirror their benchmarks. COWG avoids that trap by following a clear, rules-based process that puts free cash flow margins—not benchmark weights—at the center of stock selection.
“What’s unique about what we do is we don’t care about the benchmark weights. We only care about the metric,” he says. “Sometimes, active portfolio managers look like closet indexers.”
The disciplined adherence to profitability might make COWG a valuable satellite allocation for clients who already have core exposure to large-cap growth but want a complementary sleeve that behaves differently.
A Fit for the Current Market Environment
With interest rates elevated, capital more expensive, and inflation still a concern for many companies, prioritizing free cash flow is clearly relevant. Investors are no longer giving companies unlimited time to become profitable. Instead, they’re rewarding real earnings, strong margins, and low leverage.
The shift reflects a market maturation in which fundamentals matter more than promises. “Growth without profits eventually leads to tears,” O’Hara says. “So, that free cash flow margin screen is a way to identify high-quality companies that are profitable and generate lots and lots of free cash flow.”
The quality-first approach aligns with today’s macroeconomic environment and offers advisors a way to build resilience into growth allocations—something that cannot be guaranteed with pure market-cap-weighted solutions. COWG offers an alternative that emphasizes durable profitability, an increasingly important advantage in a market where speculation is losing steam.
Rethinking Growth for a Smarter Future
COWG is more than just a tweak on a traditional index—it’s a fundamental rethink of what growth investing should mean. By selecting companies based on free cash flow margin, Pacer delivers a strategy that favors profitability, diversification, and long-term growth potential.
“You know that what you own are companies that not only have good sales but are converting those sales into profits,” O’Hara says. “And long term, that’s the best way in our view to be an investor.”
For advisors, COWG offers a tool that pairs strong results with smart construction—free from the baggage of benchmark bias and hype-driven allocation. It’s a strategy built for resilience, relevance, and results.
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Disclosures
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