Dividend exchange traded funds have raked in billions of dollars but an obscure, actively managed ETF that focuses on companies returning capital to investors via share buybacks is crushing the market this year.
AdvisorShares TrimTabs Float Shrink ETF (NYSEArca: TTFS) is up 26.6% year to date while the S&P 500 has posted a total return of 17%, according to Morningstar.
TTFS is a relatively small fund with nearly $56 million in assets. The ETF was launched in October 2011 so it will soon have a three-year track record that could attract more investors and financial advisors.
TTFS is sponsored by active ETF specialist AdvisorShares but is sub-advised by TrimTabs Asset Management, a unit of TrimTabs Investment Research. [‘Float-Shrink’ ETF Delivers Impressive Performance]
Noted market commentator and TrimTabs founder Charles Biderman is a co-portfolio manager for TTFS. His research is based on his belief that liquidity rather than fundamentals determine stock prices.
“My basic thesis is that if you follow supply and demand, it can actually determine future stock prices,” Biderman said in a telephone interview this week.
Biderman’s strategy at TTFS, which has an expense ratio of 0.99%, screens for companies that are shrinking their float, or the number of shares outstanding. The premise is that company insiders know more about the business and its prospects than the investing public.
Next page: ‘Supply and demand’
“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.