Catherine Yoshimoto
In a high-rate, uncertain environment, US small-cap stocks are regaining attention for their potential value and resilience. The Russell 2000 Cash Flow Focus Index offers investors a targeted way to identify smaller companies generating strong free cash flow—a key measure of financial health and flexibility.
Free cash flow = resilience: Companies with high FCF often outperform during volatile markets, combining strength with flexibility.
Quantitative precision: The Russell 2000 Cash Flow Focus Index filters for quality metrics—free cash flow yield, book-to-price, dividend yield, and earnings yield.
Timing advantage: With investors rotating from large to small caps, this strategy offers a smart way to capture value and diversification.
More modest valuations, interest rate sensitivity and a greater domestic focus: these are three of the reasons investors are currently looking at the US small-cap universe in more detail.
The Russell 2000, FTSE Russell’s flagship index of US small-cap stocks, which celebrated its fortieth anniversary last year, is many market observers’ preferred access tool for this market segment.
But in an uncertain economic and market environment, some investors may wish to focus on those small caps that have innate resilience against more turbulent times.
The Russell 2000 Cash Flow Focus index, part of the FTSE Cash Flow Focus index series, enables investors to narrow the small stock universe and pick out those US smaller companies that generate the most free cash.
Why free cash flow?
Free cash flow is one of the most revealing indicators of a company’s financial health. In essence, free cash flow is the true cash a company generates, after accounting for the capital expenditures it needs to maintain its core operations.
Free Cash Flow = Operating Cash Flow − Capital Expenditures
Free cash is money that a company can deploy freely — whether that’s to pay dividends, buy back shares, reduce debt or invest in growth and innovation.
Companies with strong and consistent free cash flows are typically associated with better financial health and they can respond more quickly to competitive pressures. Their financial strength and flexibility may also be an advantage in more difficult economic times.
In aggregate, stocks with high free cash flow may offer investors an attractive combination of dividend income, potential capital appreciation and greater resilience during market downturns.
Attributes of high free cash flow stocks
Building the index
How do we build the Russell 2000 Cash Flow Focus index? The index construction approach focuses on non-financial stocks with high free cash flow (based on a composite score for free cash flow yield, book-to-price ratio, dividend yield and earnings yield). The index embeds quantitative quality and risk screens, which act as additional safeguards. And it weights the top 100 stocks by free float market capitalisation, subject to a 5% individual stock weighting cap.
Building the Russell 2000 Cash Flow Focus index
Source: FTSE Russell. Past performance is no guarantee of future returns. Please see the end for important legal disclosures.
Buffer rules then help reduce potential index turnover at quarterly review dates: exclusion from the index occurs when a stock falls to 140 or below in the ranking, while inclusion occurs when a potential new entrant rises to 60 or above.
Strategy performance
The net result is a quantitative equity strategy that has performed strongly in back-tests, outperforming the broader small-cap universe (represented by the Russell 2000) in eight of the last ten calendar years with comparable levels of volatility.
Past performance and risk statistics
| Index % (USD) | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
|---|---|---|---|---|---|---|---|---|---|---|
| Russell 2000 Cash Flow Focus Index | -3 | 22.8 | 11.6 | -8.6 | 25.1 | 13.2 | 26.5 | -12.4 | 22.2 | 20.5 |
| Russell 2000 Cash Flow Focus Net Tax Index | -3.7 | 21.9 | 11.2 | -9 | 24.5 | 12.7 | 25.7 | -12.7 | 21.6 | 19.9 |
| Russell 2000 Index | -4.4 | 24.3 | 14.6 | -11 | 25.5 | 20 | 14.8 | -20.4 | 16.9 | 11.5 |
| Index % (USD) | Return % | Return pa %* | Volatility %* | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 3M | 6M | YTD | 12M | 3YR | 5YR | 3YR | 5YR | 1YR | 3YR | 5YR | |
| Russell 2000 Cash Flow Focus Index | 11.9 | 18 | 12.9 | 10.6 | 88.5 | 128 | 23.5 | 17.9 | 22.6 | 19.8 | 20 |
| Russell 2000 Cash Flow Focus Net Tax Index | 11.8 | 17.8 | 12.6 | 10.2 | 85.9 | 122.6 | 23 | 17.4 | 22.6 | 19.8 | 20 |
| Russell 2000 Index | 12.4 | 21.9 | 10.4 | 10.8 | 52.9 | 72.8 | 15.2 | 11.6 | 23.3 | 20.9 | 21.4 |
Source: FTSE Russell, as at 30 September 2025. Past performance is no guarantee of future results. Returns shown before the index launch date (20 March 2025) reflect hypothetical historical performance. Please see disclaimer for important legal information. Please see the end for important legal disclosures.
Why now?
With many US equity investors now seeking to diversify away from the highly concentrated large-cap market, small-cap stocks are seeing a rebound in interest.
The Russell 2000 Cash Flow Focus index offers the opportunity to make a more targeted choice when making the small-cap shift—by applying a well-reasoned quantitative strategy to pick out stocks that combine defensive strength, growth potential and dividend resilience.
Disclaimer
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