As many look to alternatives strategies to hedge against potential market swings, ETF investors may consider a strategy that targets free cash flow to capture companies with organic growth.

“Focusing on free cash flow growth as our guiding metric allows us to get a true picture of the organic growth of a company,” TrimTabs Asset Management portfolio manager Janet Johnston said in a note. “It also allows us to avoid all of the ‘noise’ inherent in a company’s non-financial disclosures. We stay disciplined in our approach, which has been tried and tested over a number of years, and that allows us to create strong lists of high quality names.”

Free cash flow is the cash left over after a company has paid expenses, interest, taxes, and long-term investments. It is used to buy back stocks, pay dividends, or participate in mergers and acquisitions. The ability to generate a high free cash flow yield indicates a company is producing more cash than it needs to run the business, which can then be invested in growth opportunities.

Free Cash Flow Producing Companies

Free cash flow producing companies generally have three defining characteristics – they are productive, reliable and self sufficient. The companies generate more cash flow then they spend, which allows them to grow without external financing.

The free cash flow is sturdy measure of profitability than earnings, which are subject to manipulation and accounting assumptions. Lastly, as the companies are less reliant on capital markets for financing, they won’t dilute their issued company stocks.

Related: ETF Investors Turn Risk-Off, Fleeing Toward Fixed-Income

The TrimTabs team has produced a successful track record for its two ETF offerings, the TrimTabs All Cap International Free-Cash-Flow ETF (BATS: TTAI) and the TrimTabs All Cap US Free-Cash-Flow ETF (BATS: TTAC), by packaging their active management style along with robust quantitative analysis to provide investors with an “all weather” core equity exposures.

“The models do much of the lifting, but as active managers we also factor in the impact of variables that would not show up in a quantitative model,” TrimTabs Asset Management co-PM Ted Theodore said in a note. “So at the end of the day, you’re getting a portfolio that is, in our view, built using best in class approaches from both the quant and the active worlds.”

TrimTabs’ oldest ETF, the TrimTabs All Cap US Free-Cash-Flow ETF (TTAC), went live in 2016 and since then has been a strong performer, achieving an annualized return of 22.79% (NAV), or 6.25% percent of alpha over the Russell 3000 Index returns, its closest benchmark, as of June 30th, 2018.

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