Pacer Cash Cows 100 (COWZ) is a good ETF but beware of 2 risks

The Pacer US Cash Cows 100 (COWZ) ETF is doing well this year, helped by the rising energy prices. The stock has jumped by more than 18.5% in the past 12 months and by 10% YTD. It has underperformed the closely-watched SPDR S&P 500 ETF (SPY) and the Invesco QQQ. COWZ has done much better than the blue-chip Schwab US Dividend Equity ETF (SCHD).

What is the Pacer US Cash Cows 100 ETF?

Income investors look for several things when allocating funds in dividend ETFs. There are those who look for dividend growth. These ones are willing to take a lower dividend yield provided that it is growing well.

On the other hand, there are investors who look at the headline dividend yield paid by the fund. A good example of these are those who are investing in popular covered call ETFs like JEPI and JEPQ. These funds allocate 80% of their funds to stocks in the S&P 500 and Nasdaq 100 and the rest in the options market. Thai explains why they are able to have a 10% yield.

The popular SCHD ETF,  on the other hand, tracks the Dow Jones US Dividend 100 index, which invests in 100 companies with a record of paying dividends. 

Now, the Pacer US Cash Cows 100 ETF aims to generate regular income by focusing on dividend-paying companies that have a record of growing their free cash flow (FCF) yield. FCF is an important metric that Warren Buffett loves because it refers to the cash that a company has after running its business. 

The Pacer US Cash Cows 100 ETF screening starts from the Russell 1000 stocks, which is made of the biggest firms in the US. It then narrows to companies with the highest free cash flow yield. The result is 100 companies that have a track record of generating strong returns for their shareholders.

COWZ is good but there are 2 risks

The COWZ ETF has outperformed the SCHD fund in 2023 because of its composition. Energy is the biggest part of the fund, accounting for 32% of the total fund. The top energy companies in the fund are Valero, Marathon, Phillips 66, ExxonMobil, and Chevron. 

It is followed by health care, consumer discretionary, materials, and consumer staples. In contrast, the SCHD ETF’s biggest sectors are industrials, health care, financials, and consumer staples. Unlike COWZ, industrials account only 18% of the total fund.

Therefore, fundamentally, I believe that COWZ’s focus on energy is a good move since I expect oil prices to remain at an elevated level for a while. Many oil companies are focusing on returning their funds to investors instead of making big investments. As such, the fund will benefit if oil surges to $150 as analysts at JP Morgan expect.

The risk is that energy is a highly cyclical industry that goes through booms and bursts. For example, oil prices moved to the negative area during the pandemic before staging a major comeback. 

Another risk for the COWZ ETF is that its stock has formed a double-top pattern on the daily chart. In price action analysis, this pattern is one of the most accurate bearish signs in the market. While it has moved above the double top’s neckline, there is a possibility that it will resume the bearish trend in the near term. This view will be confirmed if it moves below this month’s low of $48.70.