The TrimTabs All Cap US Free-Cash-Flow ETF (Cboe: TTAC), which is nearly three years old, is a solid option for investors looking for a basket of companies with strong levels of free cash flow and tidy balance sheets.

TTAC tries to generate long-term returns in excess of the total return or outperform the Russell 3000 Index, with less volatility than the benchmark index, by selecting 100 companies that are both generating free cash flow and diminishing share count without the sue of leverage. The fund is run by portfolio manager Janet Johnson.

“A company’s free cash flow is its remaining cash flow after planned capital expenditures,” reports Philip Van Doorn for MarketWatch. “This is money that can be used for organic expansion, to pay dividends, repurchase shares, make acquisitions or for other corporate purposes. Free cash flow can be a better indicator of the health of a company’s business than earnings, because earnings figures can be dramatically affected by one-time events, including many types of noncash items.”

Focus On Free Cash

Free cash flow can be seen as an indicator of a company’s financial health, providing closer scrutiny of underlying corporate fundamentals, and allowing for easier identification of quality companies with growing cash reserves. Management has discretion in how they report sales, earnings, assets, and liabilities. However, free cash flow is much less likely to be subject to the same financial wizardry.

Johnson “narrows the list to an equal-weighted group of about 100 companies using computer models to screen for various factors,” according to MarketWatch. “The companies are limited to those that are expected by analysts to show large increases in free cash flow (FCF) over the next several years.”

The ETF also focuses on share reduction, “float shrink” or buybacks, where companies execute share reductions by diminishing the amount of shares outstanding. The float shrink strategy helps provide further value to the investor as people end up holding a “larger piece of the pie.”

“Since inception, the ETF has returned 48.1% through June 7, compared with a return of 33% for the Russell 3000. So far this year, the ETF has returned 17.1%, ahead of the index’s 15.5% return,” reports MarketWatch.

For more on core ETF strategies, please visit our Core ETF Channel.

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