Trim Tabs Float Shrink ETF: Investing like a CEO

Rowing together. Image screen capture from Trim Tabs web site.
Rowing together. Image screen capture from Trim Tabs web site.

WASHINGTON, August 12, 2013 – July’s recent market upheavals have alerted us once again to a simple fact: What goes up can and will come down. Sometimes at sickening speeds. At the world’s rapidly imploding political and military situations and you have a recipe for continuing turmoil in the markets.

Since the debacle of 2007-2009, almost like clockwork, one investment class or another—bonds, real estate, stocks, and now bonds again—has been swamped by waves of selling that at times seem to mimic those surging zombie hordes in last summer’s horror-thriller “World War Z.”

Individual investors still standing in this treacherous and arguably rigged market are wondering what they can do to generate some kind of meaningful portfolio return on a consistent basis over a long period of time. “Buy and hold” investing seems to be a thing of the past. But one viable flavor of that once tried and true philosophy may still remain intact and functional in the investment philosophy underpinning a little known but highly interesting ETF known by the unwieldy name of “TrimTabs Float Shrink (TTFS).” If you’re looking for a port in the continuing storm, this might just be the place.

Launched in the autumn of 2011, this actively managed ETF is operated and managed by the well-respected Trim Tabs Asset Management, LLC. The philosophy behind this relatively new fund is fairly simple—if you’re a seasoned investor.

Here’s the deal:

Today’s markets are increasingly under fire for evolving into an elitist financial playground almost exclusively owned and operated by the rich, the very rich, and the politicians and government officials that the wealthy can buy. Known to varying degrees as “insiders,” this investor class, on the whole, is savvy, well-advised, and often in a legitimate position to take advantage of corporate trends to enhance not only their own but their companies’ investment results as well.

Trim Tabs management reasons that since these insiders know more about their companies than the general public, they’re also in a position to influence the price of company shares by carefully calibrating not only the issuance of new shares but also stock “buybacks” which serve to “shrink” the existing “float” or number of shares available to the public. In other words, by buying back shares of their own company stock at discreet and timely intervals, there are less shares to go around to interested investors, decreasing the supply of shares while increasing, theoretically at least, the value of the remaining supply.

At the same time, with less shares available, company earnings per share almost automatically increase, making the shares more desirable for investors to purchase. It’s classic supply and demand and it works in favor of investors who hold such shares.

Since ultimately, it’s supply and demand that really drives the pricing of stocks, companies that reduce their share “float”—i.e., the number of shares outstanding—help make them more desirable to investors. And this is the primary reasoning behind Trim Tabs’ choice to invest in an actively managed portfolio of such shares in TTFS

Shrinking the float, however, is not the only criterion Trim Tabs uses to construct its portfolio in this ETF. They further trim the list of eligible stocks in this list by focusing on companies that repurchase their own shares with available cash (free cash flow) rather than financing buybacks by borrowing money (leverage).

The company then combines these three criteria into a score that’s matched against the large Russell 3000 Index that represents, percentage-wise, nearly the entirety of the U.S. investible market. TTFS then invests in those stocks from their list that are likely to beat this average on a consistent basis.

All this can be summed up in a singular, popular cliché: If you can’t beat ‘em, join ‘em. In other words, insiders know what they’re doing most of the time, which is why they and their companies can consistently beat the returns of the average investor or portfolio manager.

TTFS attempts to approximate this insider expertise in its managed portfolio, thus hoping to deliver a superior return, which, thus far in its short life, it has. The ETF has boasted an approximately 30% return to date since its inception in October 2011. Better yet, it pays a small annual dividend at year-end as well.

Here’s Trim Tabs’ Charles Biderman on CNBC, explaining it all to you:

This is a relatively small ETF at present, with holdings currently valued at around $54.4M when we recently took a look. Trading is light as well, with an average daily volume of around only 35,000 shares traded, which can lead to a moderately wide bid-ask spread.

As always, as in life, nothing is guaranteed in TTFS, nor in any other ETF or mutual fund for that matter.

That said, investors have known for years that corporate insiders, given their intimate knowledge of their own companies, often generate superior investment performance for themselves and their shareholders. The criteria of TTFS means to capture some of that expertise and put it to work for the average Joe Investor who could certainly use some help in a market that’s increasingly dominated by slick traders, manipulators, and high-frequency traders.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17