AdvisorShares & TrimTabs File For “Float Shrink” ETF

by on January 21, 2011 | ETFs Mentioned:

AdvisorShares, fresh off its announcement declaring a partnership with TrimTabs last week, has not wasted any time putting a product in the pipeline under this new agreement. In a recent SEC filing the two sought to gain regulatory approval for a new actively managed ETF, the TrimTabs Float Shrink ETF. The proposed fund would seek to generate long-term returns in excess of the total return of the Russell 3000 Index, while also experiencing less volatility than the broad-based benchmark.

The SEC filing calls for a fund that seeks to achieve its investment objective by primarily investing in the broad U.S. equity market, as represented by the Russell 3000 Index. The proposed ETF would invest in stocks with liquidity and fundamental characteristics that are historically associated with superior long-term performance. Based on historical research, Trim Tabs has come up with a quantitative stock selection rule set that will be used to select individual holdings [also see RAFI ETF Turns Five, Celebrates Results].

The TrimTabs methodology ranks the stocks in the Russell 3000 by decile based on the following three data points: the decrease in outstanding shares over the past 80 days (“float shrink”); the increase in free cash flow (the money available to the company that is not used to pay for its daily operations) over the past 80 days; and the decrease in leverage (measured as the ratio of total liabilities to total assets) over the past 80 days.

The top decile of each respective ranking consists of the stocks of the companies with the biggest reduction in shares outstanding, the strongest growth in free cash flow, and the largest decrease in leverage, respectively. TrimTabs then uses a proprietary algorithm to give a relative weight to the three decile rankings, combining them in a single ranking. The algorithm places a higher weight on the float shrink ranking, followed by the free cash flow ranking, followed by the leverage ranking.  According to the prospectus, the proposed fund would invest in the tenth percentile of stocks with the highest combined ranking [see more ETFs that use a Quantitative Methodology here].

This interesting product looks to further expand the increasingly wide world of active management and AdvisorShares’ product lineup in particular. Currently, the Bethesda, Maryland-based ETF issuer is responsible for five ETFs, many of which have accumulated solid asset bases in a relatively short period of time. The Cambria Global Tactical ETF (GTAA) has managed to garner more than $70 million in assets while its WCM/BNY Mellon Focused Growth Fund (AADR) remains stuck below $10 million.

The Peritus High Yield ETF (HYLD), which targets the junk bond market, has come flying out of the gates, outperforming the other three ETFs in the High Yield Bond ETFdb Category by nearly 1% already in 2011 [see Seven Wildly Successful Active ETFs].

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Disclosure: No positions at time of writing.