Is CALF a New Animal?

Shareholders of the Pacer US Small Cap Cash Cows ETF (Ticker: CALF) may have noticed an unusual change. In March, the fund dropped “100” from its former name, the “Pacer US Small Cap Cash Cows 100 ETF”. The fund name changed because it tracks an index that increased the number of its target holdings from 100 to 200. Since the index methodology changed, the ETF’s name and investment strategy changed. It now holds about 200 stocks. Advisors and DIY investors in the fund ought to be questioning whether their previously held investment thesis remains intact.

To understand the context around how and why the index change took place, it helps to know the roles of relevant players. The ETF’s benchmark is the Pacer US Small Cap Cash Cows Index. The index is owned by Index Design Group, an affiliate of Pacer Advisors, Inc., the CALF ETF sponsor. While the index is the intellectual property of Index Design Group, it is administered (for governance and regulatory purposes) and calculated by S&P Dow Jones Indices. So, Pacer is the asset management firm that sponsors the ETF and it has an affiliated company, Index Design Group, that designed and launched the index a few weeks prior to Pacer’s launch of the CALF ETF. The index inception date is May 30, 2017. The ETF’s inception date is June 16, 2017. It is clear, given the timing, that the index was launched for the express purpose of serving as the underlying benchmark of the ETF, which is a common practice.

When material index methodology changes are proposed by an index administrator, conducting a public consultation is required under global index industry regulations and is generally an accepted best practice in all markets, regulated or not. It is important to note that the source of methodology change proposals can be internal sources at the index administrator or external stakeholders like clients or other market participants. The purpose of an index consultation is to publicly inform all relevant stakeholders and gather feedback on the proposed change(s) during an open comment period. This practice creates more transparency around potential changes and, in theory, a more level playing field so that parties suggesting changes to index administrators do not have undue influence in the process or an information edge with respect to future index constitution.

Getting back to CALF and its underlying benchmark, S&P DJI launched a public index consultation on February 24, 2025 for stakeholders to be made aware, consider, and give feedback on proposed changes to the Pacer US Small Cap Cash Cows Index Methodology. The proposed changes were substantial. They included the following:

·         Change the reference index from the S&P SmallCap 600, an index of 600 companies with earnings and liquidity screens, to the S&P United States Small Cap Index, a less selective index of about 2,500 companies. (The reference index, aka “parent index”, serves as the universe from which index constituents are drawn.)

·         Change the number of index constituents from 100 to 200.

·         Change index constituent capping by introducing a more complex rule involving a fixed hypothetical market cap value.

·         Add an additional step in the order of operations that ranks stocks by their 3-month average daily value traded and eliminates the bottom quartile from index inclusion.

The consultation’s comment period lasted about 2 weeks. S&P DJI announced on March 11, 2025 that it would proceed with all its proposed changes to the index methodology at the quarterly rebalance effective March 24, 2025. In its public announcements, S&P DJI’s stated its purpose in conducting the consultation was “To enhance index liquidity and reduce concentration…”.

But why would an index administrator propose such significant index changes only a few weeks before a scheduled index rebalance? The changes may have been requested by Pacer. The fund had a few years of impressive performance from 2020- 2023, and despite experiencing some outflows, recently held about $4.2 billion of AUM. Perhaps Pacer was concerned about the market impact of trading the index portfolio given the ETF’s size.

Over the years as indexes are increasingly developed to be licensed for specific financial products, designing for investment capacity has become an integral aspect of index design. Back in 2017, Index Design Group might not have envisioned the ETF growing to $4 billion or how that size would impact rebalancing a portfolio of thinly traded small cap stocks.

An essential lesson for advisors and DIY investors to take away from this example is that the responsibility to assess the ongoing investment thesis falls on them. Most importantly, no one should put too much confidence in the impressive index history. Be aware that publicly displaying back-tested history is a common practice in the index industry. In this case, although the index inception date is May 30, 2017, its history on the Index Design Group website goes back to 12/30/1994. Any index history prior to May 2017 is a back-test (as disclosed by Index Design Group on its site). Furthermore, with the recent index methodology changes, the index history is less representative of the current index methodology. Advisors and DIY investors should develop an informed opinion about whether the underlying index, and therefore CALF itself, has been altered so fundamentally as to essentially be a new fund. This is a judgement call, but it should be informed by data and sound analysis.

Buyers beware. If you invest in narrow, complex index funds, read the index methodology and track any potential changes through the index administrator’s website. If such information is not available, run away. If it is available as was the case in this example, stay on the ball and use the information content of index consultations to inform your views.

© 2025 Philip Murphy. All rights reserved. The information presented herein is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through IndiePlan™ LLC, an investment adviser registered with the state of New York.