The Case for High Free Cash Flow Yield Investments in Today’s Market

The Case for High Free Cash Flow Yield Investments in Today’s Market

September 25, 2025

Funds in focus: Brompton Canadian Cash Flow Kings ETF, Brompton U.S Cash Flow Kings ETF, Brompton International Cash Flow Kings ETF

In September 2025, we wonder if broad North American equity exposure makes sense. Valuations for North American equities are historically high and M&A activity is picking up which may be accelerated by Fall rate cuts, putting less expensive companies in play. We think it’s time to look at the defensive/opportunistic qualities that high Free Cash Flow Yield (“FCFY”) companies can provide.

Market Valuations Signal Caution

Current equity valuations may give some investors pause. The S&P 500 is trading at approximately 27 times Trailing Twelve Months (“TTM”) earnings, expensive even compared to its 10-year median P/E of 23x¹. Meanwhile, Canada’s S&P/TSX Composite sits at a P/E ratio of 20x¹, and international equities (represented by the MSCI EAFE Index) are at 16.6x¹, which while lower than U.S. markets, may be signals that certain companies have elevated pricing given the current economic environment.

Moreover, current high valuations for certain industry sectors may become particularly concerning when viewed through historical context. High FCFY equities may offer much better value. The U.S., Canadian, and International Cash Flow Kings indices can be signals for bargains relative to the broader markets, at 11.7x, 11.2x and 10.0x TTM P/E ratios, respectively².

M&A Market Dynamics Present Opportunity

The merger and acquisition landscape has been notably quiet in recent years, with deal volumes declining 9% in the first half of 2025 compared to 2024³. Higher interest rates have increased borrowing costs and compressed valuations, leading many potential acquirers to delay transactions. This has created what Morgan Stanley describes as “pent-up supply” in the M&A market⁴. However, this slowdown may be nearing an end. With the Federal Reserve announcing a 25 bps decrease in the Fed Funds rate on September 17, many expect that financing conditions for M&A transactions will improve.

A potential shift favours high FCFY companies, which benefit from improved M&A conditions whether they are buyers (high FCF is helpful to finance takeover offers) or sellers (offering an attractive combination of high FCF and low market valuations). The recent takeout offer for MEG Energy by Cenovus illustrates how easily high FCFY companies can play either role – both companies are constituents of our Canadian Cash Flow Kings index as of August 31, 2025.

Number of M&A Deals by Financial Investors

Source: Keene Advisors, March 2025

Conclusion

Brompton’s Cash Flow Kings ETFs—KNGC (Canada), KNGU (U.S.) and KNGX (International) track indices that use rules-based methodology to gain exposure to shares of publicly-listed companies with the highest Free Cash Flow Yields. We believe these ETFs offer a disciplined, cost-effective approach to accessing high FCFY companies with compelling valuations, which provide a historically proven, attractive alternative to highly valued equity alternatives, along with significant M&A upside as rates fall. For investors navigating elevated valuations, KNGC, KNGU and KNGX stand out as efficient ways to access high-quality Free Cash Flow Yield leaders.

¹ Bloomberg as of August 15, 2025.
² LSEG Workspace as of August 15, 2025. The U.S., Canadian, and International Cash Flow Kings indices refers to Brompton Index One U.S., Canadian, and International Cash Flow Kings Indices.
³ “Global M&A Industry Trends.” PwC, 24 June 2025.
⁴ Morgan Stanley, “2025 M&A Outlook: 4 Trends Driving an Anticipated Rebound,” noting pent-up supply from delayed exits
⁵ Returns are for the periods ended August 31, 2025 and are unaudited. Inception date May 30, 2024 for KNGC and KNGU and July 16, 2024 for KNGX. The table shows the ETF’s compound returns for each period indicated. The information shown is based on net asset value per unit and assumes that any cash distributions made by the ETFs during the periods shown were reinvested at net asset value per unit in additional units of the ETF. Past performance does not necessarily indicate how the ETF will perform in the future.

This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. The opinions contained in this report are solely those of Brompton Funds Limited (“BFL”) and are subject to change without notice. BFL makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BFL assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. BFL is under no obligation to update the information contained herein. The information should not be regarded as a substitute for the exercise of your own judgment. Please read the prospectus before investing.

Commissions, trailing commissions, management fees and expenses all may be associated with exchange-traded fund investments. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Please read the prospectus before investing. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

Information contained in this document was published at a specific point in time. Upon publication, it is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. Certain statements contained in this document constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to matters disclosed in this document and to other matters identified in public filings relating to the ETF, to the future outlook of the ETF and anticipated events or results and may include statements regarding the future financial performance of the ETF. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

Chris Cullen

Senior Vice President, Head of ETFs

Joining Brompton Group in March of 2006, Mr. Cullen is a CFA charterholder and is a member of the Toronto CFA Society. He graduated with a Bachelor of Applied Science in Chemical Engineering and Applied Chemistry from the University of Toronto and a Master of Business Administration from the Rotman School of Management, University of Toronto.

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