“We constantly analyze where out-performance comes from,” adds Chen. “Two of the the primary sources of alpha are stock selection and active sector weighting. With TTFS, about 60% of its out-performance comes from stock selection and 40% from weighting the right sectors, so we’ve done both things right over the past three years.”
Speaking of sectors, some have a history of lagging when interest rates rise (think capital intensive groups such as telecom and utilities), but Chen is not overly concerned about the impact higher borrowing costs could have on TTFS. In fact, a bump in interest rates could work to the ETF’s benefit. [Sector ETFs for Rising Rates]
“Now it’s easy for companies to borrow, but going forward, as rates rise, companies with shaky finances won’t be able to borrow to buyback shares,” said Chen. “We don’t invest in those companies. Rising rates won’t hurt free cash flow generators that use that free cash to buyback shares.”
And those are exactly the type of firms TTFS targets.
TrimTabs Float Shrink ETF
Tom Lydon’s clients own shares of TTFS.