Pacer launches MILK, first Cash Cows bond ETF

Pacer has brought its Cash Cows brand into fixed income. The Pacer US Cash Cows Bond ETF (MILK) began trading on the Cboe BZX Exchange on Jan. 6. It charges 0.49%, and it is the first bond fund in a series that until now has been all equities. The fund tracks the Solactive Pacer US Cash Cows Bond Index, as ETF Strategy reported.

The index scrambles the usual credit playbook. It draws from the stock pools behind a pair of Pacer equity funds. One is the $25 billion Pacer US Cash Cows 100 ETF (COWZ). The other is the $500 million Pacer US Large Cap Cash Cows Growth Leaders ETF (COWG). COWZ screens the Russell 1000 for companies with the highest free cash flow yield. COWG looks for growth leaders with the same cash-generation discipline. Free cash flow—operating cash flow minus capital expenditures—drives both. Where most bond ETFs anchor to credit ratings, MILK targets large caps with high cash flow yield and margin, and it can hold bonds below investment grade. Pacer's premise is that a company generating cash beyond its operating needs can cover interest expense even when its rating is weak. The fund is therefore free to roam across the credit spectrum, rather than stopping at the investment-grade line.

Sean O'Hara, president of Pacer ETF Distributors, called the launch a 'natural next step' for the series. COWZ's $25 billion asset base gives MILK a built-in audience. The ticker does not hurt, either. The harder question is whether a cash-flow screen finds bonds the rating agencies undervalue. For a franchise that has stood entirely on stocks, that question now has a ticker.