TrimTabs Float Shrink: A Smart-Beta ETF

05/26/2015 9:00 am EST

Focus: ETFs

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Traditional market-cap-weighted index funds provide investors exposure to the performance—or beta—of any market; but these funds have an Achilles heel, you get a whole lot of the top-weighted companies in the index, explains Nicholas Vardy, editor of The Alpha Investor Letter.

Smart-beta ETFs offer a solution by giving investors the opportunity to outperform the mainstream market indexes, while retaining the benefits of traditional indexation. That’s because smart-beta ETFs link to an alternative index, one that is not market-cap weighted.

One of my favorite smart-beta investment strategies for 2015 is TrimTabs Float Shrink ETF (TTFS). The ETF uses an equal-weight strategy that invests in companies that have reduced their shares outstanding over the prior 120 days.

Its holdings are selected based on three primary criteria: shareholder friendliness via float shrinkage, profitability measured by free cash flow and balance sheet sturdiness measured by leverage ratio.

That means that how companies fund buybacks and reduce net shares outstanding are also important ingredients in TTFS’ stock selection. The ETF screens for robust free cash flow and shies away from highly leveraged firms that fund buybacks with new debt.

TrimTabs Float Shrink is in a hot space as share buybacks are all the rage in corporate America. Between 2009 and 2014, companies implemented $2.1 trillion in buybacks. The tech sector alone has added $24.3 billion in new buyback capacity year to date, the second-highest among all sectors.

The ETF recently celebrated its third anniversary and received a five-star rating from Morningstar for risk-adjusted performance. It beat its benchmark of the Russell 3000 Index handily with annualized returns of 22.15% in the past three years, versus its benchmark of 18.16% for the Russell 3000 Index.

TrimTabs Float Shrink also just surpassed $225 million in assets under management, meaning it has more than doubled in size in just the past 14 months. It charges a net expense ratio of 0.99%. With a beta of 1.07, it is slightly more volatile than the S&P 500.

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