In the competitive world of exchange-traded funds (ETFs), the Pacer US Large Cap Cash Cows Growth Leaders ETF (ticker: COWG) is capturing attention for its innovative approach to growth investing. By focusing on free cash flow and free cash flow margin, COWG provides advisors and their clients with a compelling alternative in a space often dominated by a handful of high-concentration names.
As growth strategies evolve, this fund offers a much-needed solution for those seeking diversification and reduced risk in their equity exposure. Unlike funds concentrated heavily in the Magnificent Seven, COWG’s strategy emphasizes profitability and growth potential beyond the usual suspects. Sean O’Hara, president at Pacer ETFs Distributors, spoke with The Wealth Advisor’s Scott Martin about how the fund helps advisors diversify portfolios, mitigate risk, and uncover overlooked opportunities—all while maintaining a focus on delivering growth.
Addressing Concentration Risk
Advisors seeking diversified growth exposure face a significant challenge: many traditional growth ETFs are heavily concentrated in a small group of mega-cap tech stocks. This overconcentration can create unnecessary risk in portfolios, especially as markets slowly broaden beyond these dominant names.
The most striking feature of COWG is its dramatic departure from traditional growth ETF compositions. While most growth funds maintain 35–40% exposure to the Mag Seven stocks—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—COWG takes a distinctly different approach. As O’Hara explains, as of December 2024, “COWG only has 4% of the weight in those Mag Seven names, and only 16% overlap with your traditional growth benchmarks.” This structural difference offers advisors a genuine diversification tool at a time when many growth portfolios may be inadvertently concentrated in the same handful of names.
This reduced concentration provides advisors a chance to mitigate risk while maintaining exposure to growth equities. “I think people are starting to wake up to the fact that they’re taking a lot more risk in a broad-based growth ETF because most of the money is in a very small number of names,” O’Hara says.
A Unique Growth Strategy
At the heart of COWG’s methodology is a focus on free cash flow margin. The fund serves as a sister product to Pacer’s traditional value ETF (the Pacer US Cash Cows 100 ETF, COWZ), which uses free cash flow yield as its primary metric. Together, these products demonstrate Pacer’s commitment to providing advisors with tools that can work together to create more resilient portfolios.
Rather than simply chasing revenue growth, this approach helps identify companies that aren’t just growing revenues but are converting those sales into actual profits, and generating excess cash beyond their operational needs. When considering the cautionary tale of companies such as Peloton, where high sales never translated into profitability, the lesson is clear: As O’Hara puts it, “They never really got around to the making money part.” By focusing on free cash flow margin, COWG aims to identify companies that demonstrate both sales growth and earnings growth, avoiding the pitfall of unprofitable growth stories.
Hidden Gems in the Portfolio
The fund’s methodology has led it to identify overlooked growth opportunities across various sectors. One notable example is AppLovin Corporation, a company that helps app developers monetize their customer base through improved targeting capabilities. “What AppLovin does is it helps these folks solve that problem and increase their percentage connection at a lower price,” O’Hara explains, noting that the company addresses one of the key challenges highlighted on shows like Shark Tank—the cost of customer acquisition.
Another unexpected growth story is Texas Pacific Land Corporation, which operates in the mineral rights space—far from traditional technology growth sectors. Rather than directly engaging in oil exploration, the company takes a different approach to energy sector growth, acquiring mineral rights from landowners and then leasing them to exploration companies.
Both companies have outperformed market favorite Nvidia year-to-date, O’Hara notes, demonstrating that significant growth opportunities exist beyond the usual suspects, particularly when targeting companies with strong business models and cash flow generation rather than just sector momentum.
A Complementary Approach to Portfolio Construction
Instead of positioning COWG as a replacement for traditional growth ETFs, Pacer suggests using the fund as a complementary holding to reduce portfolio concentration risk. O’Hara offers a practical suggestion: “You could say, for example, take the Qs, and then get rid of the Russell growth, and then supplement that with COWG. Therefore, you have a new portfolio that doesn’t have the high overlap, doesn’t have that high concentration.”
This approach allows advisors to maintain exposure to well-known growth names while adding a layer of diversification through companies that have demonstrated strong cash flow generation capabilities. The strategy acknowledges that although the current market leaders may continue their strong performance, a more balanced approach to growth investing could provide better risk-adjusted returns over time.
The Power of True Diversification
One of COWG’s key advantages lies in its ability to provide meaningful exposure to companies that barely register in traditional growth indices. For instance, AppLovin represents just 0.01% of the Russell 1000® Growth Index, making it effectively insignificant in traditional growth portfolios. COWG’s approach allows for more substantial positions in these overlooked opportunities while maintaining a disciplined focus on financial fundamentals.
As O’Hara emphasizes, these smaller companies can deliver impressive returns, pointing to examples like AppLovin and Texas Pacific Land, both delivering performance that would be largely missed in traditional growth indices owing to their minimal weightings.
Practical Implementation for Advisors
For advisors looking to implement COWG in client portfolios, the fund offers a way to demonstrate active management of concentration risk without abandoning growth exposure entirely. As O’Hara notes, “This gives you a true opportunity to diversify in that growth part of your portfolio where you’re not relying upon the same exact names that everybody else has stacked into their ETFs or into their funds.” By design, COWG is particularly valuable for advisors who are concerned about redundancy in their portfolio construction.
The strategy resonates with both advisors and clients who share concerns about high valuations in the most popular growth names, offering a concrete solution that maintains growth exposure while potentially reducing portfolio risk. Ultimately, the approach allows advisors to have meaningful conversations with clients about diversification while still participating in the growth segment of the market.
Moving Forward
As the market continues to evolve and investors grapple with questions about concentration risk and valuation levels, tools such as COWG provide advisors with practical solutions for portfolio construction. The fund’s focus on free cash flow margin offers a disciplined approach to growth investing that may resonate with clients who are becoming increasingly sophisticated in their understanding of market risks.
For advisors seeking to demonstrate value through thoughtful portfolio construction, COWG represents an opportunity to address client concerns while maintaining exposure to growth opportunities wherever they may emerge in the market.
_____________________
Additional Resources
______________________
Disclosures
This content is intended for financial advisors only.
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 1-877-577-2000. 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, derivatives risk, equity market risk, ETF risks, futures contracts risk, high portfolio turnover risk, large- and mid-capitalization investing risk, passive investment risk, tracking risk, sector risk, style risk, and/or special risks of exchange-traded funds.
NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED
Distributor: Pacer Financial, Inc., member FINRA, SIPC, an affiliate of Pacer Advisors, Inc.
