Let's review the recently trending Free Cash Flow ETF

In the investment market of 2026, a clear trend is emerging: free cash flow strategies are gaining popularity and becoming the new favorite of “smart money.”

The index and related ETFs of free cash flow strategies have been around for over a year, but many investors may still wonder: what exactly is free cash flow? Why does it stand out in the current market environment? Next, let’s break down this “profit catcher” in simple terms to understand its investment value.

01. High dividend yields no longer attractive?

Over the past three years, high dividend assets have served as a “safe haven” in the market due to stable dividends. But after entering 2026, the situation is changing.

The main reason is simple: the macro environment has shifted.

As tangible inflation gradually returns, profit cycles are beginning to recover. Relying solely on cash dividends from high dividend assets is starting to lag behind market trends.

From the perspective of profit growth differences, Huachuang Securities believes that when the macro economy enters a phase of profit recovery, high-quality growth represented by the CSI 800 Growth Index shows more significant profit elasticity compared to pure cash dividend strategies represented by the CSI High Dividend Index. The profit growth rate gap between the two tends to widen, and during this period, the CSI 800 Growth Index has also delivered obvious excess returns over the CSI High Dividend Index, such as from Q1 2020 to Q2 2021, and from Q3 2024 to now.

This is like buying a house: when the market is sluggish, people pay more attention to rental income (corresponding to dividends); but when the real estate market recovers and house prices rise, the gains from appreciation (corresponding to profit growth) become the main focus. Currently, the market is shifting from “rent-to-price ratio” dominance to “appreciation potential” priority.

The free cash flow strategy precisely targets this core demand. It not only looks at how much a company pays out now but also focuses on the company’s true earning ability and cash creation capacity, which are the keys to profit growth.

02. Free cash flow uses “real money” to assess company value

Some may think “free cash flow” sounds very professional, but it can be understood simply: the money a company earns from operations minus the necessary expenses to maintain operations, which is truly free to be used at will.

For example, a factory earns 10 million yuan from sales in a year, but spends 3 million yuan on updating equipment and expanding the plant. Its free cash flow is 7 million yuan. This 7 million yuan is the real “hard cash” the company can use for dividends, share buybacks, or further investments.

Compared to the index of high dividend strategies, the free cash flow index has three advantages:

• Faster response: High dividend indices are usually rebalanced once a year, while free cash flow strategies (e.g., the China Securities Free Cash Flow Index) are rebalanced quarterly, allowing for quicker capture of profit changes. Like a radar, the higher the scanning frequency, the less likely to miss targets.

• More authentic: Profits can be manipulated through accounting tricks, but cash flow cannot lie. Some companies show good profits on paper but have negative cash flow and cannot sustain dividends; companies with ample free cash flow have truly solid profitability.

• Better suited to current market conditions: Since July 2025, the PPI turning point has appeared, and the pro-cyclical market has just begun. The subsequent return of inflation will accelerate corporate profits, and free cash flow is a good tool to capture this profit elasticity.

Image source: Huachuang Securities

03. Free cash flow strategies continue to prove themselves

The China Securities Free Cash Flow Index has demonstrated its strength with solid data:

Since 2015, the index has shown outstanding long-term performance. Using the total return index (including dividends) to analyze risk and return characteristics, the China Securities Free Cash Flow Total Return Index (480092.CNI) as of December 31, 2025, has achieved a cumulative increase of 446%, with an annualized return of 17.2%, significantly outperforming the CSI Dividend, Dividend Low Volatility, and CSI 300 total return indices. Over the past ten years, it only declined in 2016 and 2018, and from 2019 to 2025, it has experienced positive growth for seven consecutive years【1】.

More noteworthy is its industry allocation, which is highly adaptable to the 2026 market environment, aligning with the pro-cyclical main line and covering high-profit quality sectors:

• (1) Cyclical manufacturing: cash flow release under supply constraints

In the context of the domestic real estate cycle downturn and PPI hitting bottom, capital support for cyclical industries has continued to decline over the past five years, with capacity expansion slowing and overall supply tight. Under tight supply, demand has rebounded significantly, and strong price elasticity is expected to drive overall performance improvement in cyclical sectors.

• (2) Consumer manufacturing: internal demand recovery and quality dividends resonate

Home appliance industry: The 2025 national subsidy policy for home appliances continues as scheduled, with increased subsidy categories and standards, likely leading to valuation recovery driven by policy implementation.

Automobile industry: As the largest weight in the index, benefiting from exports of new energy vehicles and intelligent upgrades, the sector’s profit elasticity continues to be released.

04. 2026, more aligned with free cash flow

• (1) The pro-cyclical market has just begun

Currently, the pro-cyclical market is still in the “valuation expansion” phase. As PPI turns positive, corporate profits will accelerate recovery, entering a “valuation + performance” double-drive phase, and the sensitivity of free cash flow strategies to profit changes is key to capturing this wave.

• (2) Institutional funds are increasing their positions

As of Q4 2025, active equity mutual funds still have low allocations to cyclical sectors, with overweight positions in non-ferrous metals, basic chemicals, and other sectors with high free cash flow. As the pro-cyclical trend deepens, increased institutional investment will bring incremental funds to these sectors.

• (3) Valuations still have safety margins

The PE-TTM (unadjusted) of the China Securities Free Cash Flow Index is 16.09X, placing it in the 57.48th percentile over the past five years. With profits continuing to improve, this valuation level still has room for upward adjustment.

The market in 2026 is shifting from “seeking stability” to “seeking progress.” The rise of free cash flow strategies is precisely because they align with the core theme of profit recovery. As tangible inflation returns and “real money” profit growth becomes the market main theme in 2026, free cash flow strategies, with their precise capture of profit elasticity, long-term steady returns, and high industry alignment, possess outstanding investment value.

Related products:

Free Cash Flow ETF (159201): Closely tracking the China Securities Free Cash Flow Index, the largest product in the same track, with management fee/trustee fee of 0.15%/0.05% annually, among the lowest in its category.

【1】Data source: Wind, from 2015.1.1 to 2025.12.31. All index performance calculations use the total return index (including dividend reinvestment). The China Securities Free Cash Flow Index base date is 2012.12.31. As of August 15, 2024, the index was revised by Shenzhen Securities Information Co., Ltd. The total return index from 2021-2025 increased by 49.15%, 5.95%, 28.92%, 32.44%, 17.85%, respectively; the price index increased by 43.81%, 1.53%, 21.87%, 28.07%, 14.23%. The annualized return calculation formula is [(1 + period return)^(250/trading days) - 1] * 100%. Past performance and net asset value levels do not predict future results.

Note: This article reflects the author’s opinions and is for reference only.

Scroll down to view product information and risk warnings:

Data source: iFinD, as of March 10, 2026. Fund size does not indicate performance level; size data is point-in-time and not for long-term reference. The China Securities Free Cash Flow Total Return Index (480092.CNI) base date is 2012.12.31, with full-year returns since inception of -3.03%, 56.78%, 16.71%, -1.74%, 32.06%, -14.73%, 17.69%, 13.05%, 49.15%, 5.95%, 28.92%, 32.44%, 17.85%. The CSI 500 Free Cash Flow Total Return Index (932367CNY010.CSI) base date is 2013.12.31, with full-year returns since inception of 46.91%, 34.11%, -5.23%, 21.46%, -21.70%, 24.33%, 10.24%, 26.25%, -7.88%, 10.11%, 22.56%, 33.11%. Past performance and net asset value levels do not predict future results.

Fee structure: Investors trade these ETFs on the stock exchange like stocks. Main costs include broker commissions and fund operation fees, including management fees (Free Cash Flow ETF 0.15%/year, Cash Flow 500 ETF 0.5%/year), custody fees (Free Cash Flow ETF 0.05%/year, Cash Flow 500 ETF 0.1%/year), deducted from fund assets. These ETFs do not charge subscription, redemption, or sales service fees. Authorized agents may charge commissions up to 0.5%, including fees from stock exchanges, depositories, and settlement institutions.

Risk warnings: 1. These funds are equity funds mainly investing in constituent stocks of the target index and alternatives, with higher expected risk and return than hybrid, bond, or money market funds, classified as medium-high risk (R4). The specific risk rating results are provided by the fund manager and sales institutions. 2. Risks include deviation of index returns from average market returns, index volatility, and divergence between fund portfolio returns and index returns. 3. Before investing, investors should carefully read the fund’s “Fund Contract,” “Prospectus,” and “Product Profile,” fully understand the risk-return characteristics and product features, and consider their own investment objectives, time horizon, experience, and asset situation. Make rational and cautious investment decisions based on understanding and sales suitability opinions, and bear the investment risks independently. 4. The fund manager does not guarantee profits or minimum returns. Past performance and net asset value do not predict future results; performance of other funds managed by the manager does not guarantee this fund’s performance. 5. Investors are reminded of the “buyer beware” principle; after making an investment decision, the risks arising from fund operation, trading prices, and net asset value fluctuations are borne by the investor. 6. The China Securities Regulatory Commission’s registration of this fund does not imply any substantive judgment or guarantee of its investment value, market prospects, or returns, nor does it mean there are no risks. 7. This product is issued and managed by Huaxia Fund; distributors do not bear investment, redemption, or risk management responsibilities. 8. The stocks mentioned do not constitute stock recommendations. Funds carry risks; invest cautiously.