Three ETFs focused on free cash flow and quality stocks lead smart beta strategies amid higher rates and AI-driven capex shifts.
Three exchange-traded funds tracking free cash flow and quality stocks have outperformed other smart beta strategies in 2026. Pacer US Cash Cows 100 ETF (COWZ) rose 9% year-to-date and 25% over the past year, screening for Russell 1000 companies with the highest free cash flow yields. iShares MSCI USA Quality Factor ETF (QUAL), holding $47.1B in assets, posted 23% one-year returns with a 0.87% dividend yield.
Smart beta strategies faced headwinds in early 2026 as momentum cooled and low-volatility funds lagged. Elevated interest rates and refinancing costs favored companies generating real cash, while provisions in the One Big Beautiful Bill Act boosted free cash flow for R&D-heavy sectors. VanEck Morningstar Wide Moat ETF (MOAT) underperformed peers year-to-date but delivered 19% annual gains.
The shift reflects investor preference for firms with durable competitive advantages and returns above their cost of capital, particularly as AI-driven capital expenditures reshape sector dynamics.