ETF Trends
ETF Trends

The first quarter was one of the strongest in several years for mergers and acquisitions. If the early part of the second quarter is an accurate gauge, that trends shows no signs of abating.

Last week, Royal Dutch Shell (NYSE: RDS-A), Europe’s largest oil company, said it is acquiring rival BG Group for $70.2 billion in the oil industry’s largest acquisition in a decade. On the same day, generic drugmaker Mylan (NYSE: MYL) offered to acquire Israeli rival Perrigo (NYSE: PRGO) for $205 per share, or $28.86 billion.

In what may be a surprise to some investors, increased mergers and acquisitions activity could prove to be a boon for the TrimTabs Float Shrink ETF (NYSEArca: TTFS).

TTFS portfolio manager Minyi Chen believes that as low rates are fueling M&A activity, companies with a shrinking equity float, strong free cash flow growth, and low leverage are more likely to become a target because of their healthy balance sheets.

The actively managed TTFS does not focus solely on share buybacks. Rather, the $221.6 million ETF emphasizes net share count reduction by focusing on companies that achieve a low shares outstanding tally without using massive amounts of debt to fund buybacks.

Sub-advised by TrimTabs Asset Management, TTFS is an equal-weight fund that focuses on companies that have reduced their shares outstanding over the prior 120 days. The ETF’s 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. [Another Milestone for the Float Shrink ETF]

Since TTFS debuted in October 2011, 57 of its holdings have been acquired, indicating that buyers enjoy acquiring firms with tidy balance sheets. On average, 1.3 TTFS holdings per month have been acquired since the ETF launched. Alone, that statistic is impressive, but it is even more so when considering the ETF holds just 100 stocks.

Previous TTFS holdings that have been acquired include Allergan, Coventry Health, Forest Labs and Molex.

Due to increased buyback capacity from the technology sector, that group accounts for 20% of TTFS’ weight. The ETF allocates 18% of its weight to the healthcare sector, one of the busiest groups for mergers and acquisitions activity this year. Consumer discretionary and industrial names each receive 16% weights in TTFS. [Selective Approach to Buyback ETFs]

The ETF has received two consecutive five-star ratings from Morningstar and has seen its assets under management swell by more than 10% since eclipsing $200 million five weeks ago.

TrimTabs Float Shrink ETF

Tom Lydon’s clients own shares of TTFS.