An ETF Strategy Focusing on Companies with Strong Free Cash Flow

As we break down how certain sectors of the economy will react to the election, investors can consider an exchange traded fund strategy that could benefit in the environment ahead.

In the recent webcast, The Fundamental ​​​You’re Probably Overlooking: Free Cash Flow, Bob Shea, CEO and Chief Investment Officer, TrimTabs Asset Management, explained that the current markets have found support from unprecedented fiscal and monetary policies, with U.S. government spending as a percentage of GDP at its highest since World War II. It is not just the U.S. that’s aggressively throwing money into its economy, countries around the world have enacted robust stimulus measures to support ailing economies that have taken a blow from the coronavirus pandemic.

After the swift rebound, Shea argued that market participants are now hung up on exaggerated concerns, such as the Federal Reserve running out of ammo in policy tools, the economy can’t survive without additional fiscal support, risk assets or stocks are stupidly expensive, and a disputed election will rock the markets.

Specifically, the presidential election has been a major topic as votes will be tallied in just a couple of weeks. John Forlines III, Chief Investment Officer of Donoghue Forlines, Portfolio Manager for the Donoghue Forlines Global Tactical Portfolios, noted that that the election would likely only cause short-term volatility with the initial one or two month spike in volatility. For the long-term markets, there’s little difference between a Republican or Democratic party in the Oval Office.

“Returns in the Obama years were not so different from returns during Trump years,” Forlines said.

Since 1901, the Dow Jones Industrial Average returned an average 60.9%, with an average return of 44.2% during a Republican presidency and an average 85.9% during a Democratic presidency.

However, Forlines warned that there could be greater unknowns with Joe Biden as president. Looking at Biden’s policy plans, the markets anticipate a short to intermediate bullish outlook, but the longer term outlook remains questionable.

In this type of market environment, investors could consider the TrimTabs All Cap International Free-Cash-Flow ETF (BATS: TTAI) and the TrimTabs All Cap US Free-Cash-Flow ETF (BATS: TTAC) to capitalize on quality companies with steady free cash flow. Free cash flow is a marker for high quality and limits exposure to rising bankruptcies and degrading credit quality. Furthermore, the ETFs are actively managed to provide greater flexibility and are backed by quantitative analysis that can be quickly adjusted to adapt to a dynamic market.

Janet Flanders Johnston, Co-Chief Investment Officer and Portfolio Manager, TrimTabs Asset Management,  explained that the Free Cash Flow ETFs uses an algorithm that produces a high-quality list of candidates in real time; looks for free cash flow strength, share reduction and balance sheets; positions include disruptive and innovative technologies, wide economic moats, sustainable competitive advantages, and a reduction in political and regulatory risks. An investment committee meets bi-weekly to review the model output and portfolios.

Financial advisors who are interested in learning more about free cash flow strategies can watch the webcast here on demand.