By Sudip Kar-Gupta
LONDON (Reuters) - A new exchange-traded fund is targeting Europe's top cash generators as persistent fears over Greece and the prospect of rising interest rates keep markets on edge.
The fund's top stocks come at a cost - above-average valuations - but portfolio managers said it could outperform if stock markets drop back again.
The 'cash is king' mantra of many investors, including billionaire Warren Buffett, is the main driver behind the Trim Tabs International Free Cash Flow exchange traded fund
The fund launched in June and is relatively small with only $12 million in net assets, while valuations of many European blue-chip stocks are above their historic 10-year averages, according to Thomson Reuters Datastream. http://bit.ly/1e4oyTi
Nevertheless it has risen roughly 5 percent this week, as markets worried about Greece and potential U.S. and British rate rises.
Exchange traded funds are baskets of securities which can be traded on markets. They are often cheaper than mutual funds and, according to data from research firm ETFGI, exchange traded funds and products listed in Europe in the first half of 2015 accounted for a record $40 billion in net new assets.
Investors said that while this cash-flow ETF might underperform in a rising stock market, it offered protection.
"Cash generation is a key indicator that I always look at before I invest. Companies with high free cash flow yields will be coming increasingly into focus as they are typically well placed to weather downside volatility," said Lex Van Dam, hedge fund manager at Hampstead Capital.
Companies with high cash-flow are seen as more resilient to an economic downturn than those with higher debt and less cash, and they also often offer solid dividend payouts.
The fund's top holdings feature Zurich Insurance (VX:ZURN), Deutsche Telekom (DE:DTEGn), and watchmaker Swatch (VX:UHR).
According to Thomson Reuters StarMine data, free cash-flow yields are 10 percent for Deutsche Telekom, 9.3 percent for Swatch and 6.7 percent for Zurich Insurance.
These are stronger than the 3.8 percent average for the pan-European STOXX 600 index (STOXX) and 4.5 percent for the U.S S&P 500 (SPX), according to StarMine.
They do, however, come with above market-average valuations. Deutsche Telekom is on a ratio of 22.1 for its estimated price-to-earnings (P/E) in the next 12 months, compared to an average P/E ratio of 16 for the STOXX 600, according to StarMine.
Nevertheless, fund managers at Swiss bank Reyl and SteppenWolf Capital said the ETF offered easy access to Europe's top cash generators.
"For investors who want to focus on companies with solid cash flow, this is one easy way to do it - instead of looking up thousands of companies yourself, you can let the ETF advisor to it for you," said Phoebus Theologites at SteppenWolf Capital.