“Supply and demand also dictates that stocks should perform best when their float is shrinking. All else being equal, if the same amount of money is chasing a smaller float, then the share price increases,” according to a fact sheet on the ETF. Aside from shareholder-friendliness as measured by float shrink, TrimTabs also screens companies based on profitability and balance sheet strength. [Buyback ETFs Sitting on Big Gains]
Using the analogy of a casino, Biderman referred to company insiders as the “house” and investors are the “players.”
“The house has an advantage,” he said. “Companies with low leverage shrinking their float with free cash flow tend to outperform.”
Biderman said the ETF wrapper is a great way to deliver his high-turnover strategy, which rebalances monthly, to individual investors with tax efficiency.
PowerShares Buyback Achievers (NYSEArca: PKW) and Guggenheim Insider Sentiment (NYSEArca: NFO) also incorporate share buybacks into their approaches. PKW and NFO have assets of $1.2 billion and $130 million, respectively.
Biderman said the market has generally ignored float-shrink strategies as a generator of alpha, or outperformance.
“Our strategy worked in backtests,” he said. “Now with the ETF I have proof that it works in the real world.”
For companies with cash on the balance sheet, Biderman said share buybacks are a more tax-efficient means for companies to return capital to shareholders while also increasing their ownership.
However, dividend-themed ETFs have been much more popular than funds like TTFS that incorporate share buybacks. For example, Vanguard Dividend Appreciation ETF (NYSEArca: VIG), iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY) and SPDR S&P Dividend ETF (NYSEArca: SDY) each hold well over $10 billion of assets. There are dozens of dividend ETFs to choose from.
“Those investors who think it’s all about earnings and dividends – they’ll never buy my fund,” Biderman remarked.