When it comes to all-encompassing small cap exposure, the iShares Russell 2000 ETF (IWM) has typically been the default choice. Therein lies the issue—while small-cap funds can provide tremendous growth opportunities, IWM’s market-cap-weighted methodology poses a profitability problem—one that’s easily solved by the VictoryShares Free Cash Flow Next Shares ETF (SFLO) and the Invesco S&P SmallCap 600 QVM Multi-Factor ETF (QVMS).
IWM tracks the Russell 2000, which can contain zombie companies. These are companies that don’t generate enough profit to cover debt servicing costs. In a higher-for-longer inflationary environment like now, that problem is only exacerbated. That said, SFLO and QVMS use screening methodologies that filter for profitable small cap companies.
SFLO: Free Flowing in Cash
VictoryShares has a specialized suite of ETFs that focuses on free cash flow (FCF). This is the remaining cash available after deducting operating expenses and capital expenditures (CapEx). By screening for companies with high FCF yields, this automatically addresses the profitability problem.
In the world of small-caps, FCF can be the ultimate source of truth. IWM includes many speculative growth companies that can burn through cash, including the aforementioned zombie companies. SFLO tracks the VettaFi Free Cash Flow Next Index, which filters for small cap companies with strong FCF yields. Companies with high FCF spend can reinvest in their operations, offer dividends, buy back shares, make strategic acquisitions, or perform other activities that create shareholder value.
Additionally, companies with a FCF cushion can typically weather market drawdowns better than those that don’t. With volatility spiking in the first quarter of 2026, this is an important factor to consider when investing in small caps.
QVMS: A Triple-Factor Filter
Invesco’s QVMS takes a different, but an also rigorous approach. The fund targets three primary factors: quality, value, and momentum. Unlike IWM, QVMS doesn’t screen for companies found in the Russell 2000. Instead, it narrows its focus to the S&P SmallCap 600 index, which already includes a baseline profitability hurdle companies must get over before inclusion.
Overlaying a multi-factor into this higher-quality index means that QVMS holdings are fundamentally sound while exhibiting positive price trends. As such, this prevents the value traps inherent in a market-cap-weighted index that IWM tracks.
Advisors and investors are increasingly looking at small cap opportunities this year as valuations in certain mega-cap companies may appear overstretched. While opportunities exist in small caps for growth, it takes a discerning screener to filter out unprofitable companies that can anchor down a market cap-weighted index. By utilizing the FCF methodology of SFLO or the multi-factor screener utilized by QVMS, investors can get quality exposure in a challenging market environment that demands a focus on fundamentals.
For more news, information, and strategy, visit ETF Trends.
VettaFi LLC (“VettaFi”) is the index provider for SFLO, for which it receives an index licensing fee. However, SFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of SFLO.
