The ETF industry continues to evolve, as more unique products make their debut; however, the exchange-traded landscape is still dominated by passive, index-based instruments. This shouldn’t come as a surprise, because after all, investors have embraced this product wrapper for its unparalleled ease-of-use and cost-efficiency, with many of these funds earning themselves the reputation as “core holdings” in countless portfolios. On the other end of the spectrum, actively-managed ETFs haven’t exactly been in the spotlight as many criticize their above-average expense ratios and failure to deliver exceptional returns. While this may be true for some, it’s certainly not the case when it comes to the TrimTabs Float Shrink ETF (TTFS).
Inside TTFS’s Strategy
TTFS takes an entirely different approach to security selection when compared to other actively-managed equity ETFs or even so-called “smart beta” products; for the most part, these other funds start with a broad universe of securities, apply a number of fundamental filters, and ultimately end up with a basket of holdings that is more-or-less a trimmed down version of some broader index out there. While there is nothing inherently wrong with this approach, it does help to illustrate why TTFS is unique [see also TrimTabs Insights: What "Float-Shrink" Means to Investors].
The TrimbTabs Float Shrink ETF separates itself from the pack in that it relies on supply and demand criteria to select its underlying securities rather than fundamental metrics, such as dividend yield or earnings growth. At the root of TTFS’s methodology is a liquidity-based approach that revolves around three main criteria:
1. Float Shrink – the management team tracks the number of shares outstanding for more than 3,000 securities. This is where supply-demand theory kicks in; securities with a decreasing number of shares outstanding, or a shrinking float, are selected as candidates because all else being equal, the same amount of money chasing a fewer number of shares should translate into price appreciation.
2. Profitability – TTFS does employ some fundamental screening criteria; for starters, a company’s profitability as measured by free cash flow is considered. The more cash flow positive a stock is, the better, since that hints at a potential uptick in demand for that security.
3. Leverage Ratio – The management team also looks to avoid companies with fragile balance sheets; to do so, TTFS aims to focus on securities with a stable leverage ratio.
In summary, TTFS’s strategy is actually quite straightforward; the management team aims to select securities with a contracting supply, as evidenced by a decreasing number of shares outstanding, and those that have the potential to see an increase in demand, as evidenced by increasing profitability and a stable leverage ratio. Simply put, if supply is decreasing and demand is increasing, logic points to higher prices.
Under the Hood of TTFS
When all is said and done, TTFS is left with 100 securities from a starting universe of approximately 3,000. The securities that make the cut are those that boast the most favorable of all three criteria outlined in the strategy section above. Aside from employing such a rigorous screening methodology, TFFS’s underlying portfolio also separates itself from many other funds in the equity space in that its equal-weighted rather than market capitalization-weighted. In essence, every security receives roughly the same allocation, which results in a tilt towards small- and mid-cap stocks that might otherwise be more neglected when it comes to allocations in other market cap-weighted funds [see also Comparing Alternative Weighting Methodologies].
Digging deeper, let’s see what made the cut in TTFS; keep in mind however that because the portfolio is actively-managed, it’s allocations are bound to evolve over time and the holdings are re-balanced on a monthly basis.
At the time of writing, some of the top holdings in TTFS include: Allied World Assurance (AWH), Ross Stores (ROST), Axis Capital Holdings (AXS), Expeditors International (EXPD), and TJX Companies (TJX). In terms of sectors, TTFS holds the biggest allocations in the Information Technology and Consumer Discretionary sectors, at around 20% each, while Healthcare, Industrials, and Financials make up the next biggest chunks. Overall, because of its rigorous screening coupled with an equal-weighted approach, this ETF’s underlying portfolio is well-balanced.
Considerations for TTFS’s Performance
Investors should note that, generally, TTFS’s performance will be very similar to the broader U.S. equity market. As an actively-managed product, this ETF’s performance should be compared to its stated benchmark, which is the Russell 3000 Index. Below, let’s consider how this ETF has performed versus the iShares Russell 3000 ETF (IWV) since its inception on October 5th of 2011 through mid-October of 2014:
Over the years, TTFS has managed to return approximately 46%, outperforming the Russell 3000 ETF, which has returned approximately 34% in that same time frame. While it’s true that TTFS is more expensive, charging 0.99% in management fees compared to IWV’s 0.20%, this wide of a margin in performance since it debuted is enough to make you forget about its steeper expense ratio [see The Cheapest ETF for Every Investment Objective].
How to Use TTFS in a Portfolio
In light of TTFS’s above-average expense ratio, it’s difficult to recommend this as a core holding over the long-haul, especially for cost-conscious investors. With that being said, those that lack U.S. equity exposure and find the liquidity-based approach compelling (and the impressive track record thus far) may consider this is a viable alternative to other passive, index-based equity funds.
All in all, TTFS is perhaps best utilized as a tactical holding for those looking to build out their equity exposure. For some, this can certainly be a core holding; however, the actively-managed approach does introduce a degree of risk that may steer away more conservative investors, and especially those looking to minimize costs.
The Bottom Line
The methodology employed by TTFS makes it one of the most unique ETFs on the market; more importantly, its impressive track record should serve as a testament that actively-managed products can in fact deliver stellar results that are worth the higher management fees. For anyone looking to diversify their equity exposure with a one-of-a-kind strategy, TTFS most certainly warrants a closer look.
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Disclosure: No positions at time of writing.