How TTFS Uses Liquidity Theory to Beat Its Benchmark

by on December 4, 2013 | ETFs Mentioned:

Innovation remains the key catalyst when it comes to the seemingly endless expansion of the exchange-traded funds universe. Investors of all walks have embraced this product structure as the preferred means for establishing cost-efficient exposure to virtually any asset class around the globe. Furthermore, besides opening up the investment landscape, the proliferation of ETFs has brought strategies that were previously reserved for more sophisticated and wealthy investors to the fingertips of anyone with a basic online brokerage account [see 101 ETF Lessons Every Financial Advisor Should Learn].

The actively-managed ETF space has grown to 65 funds thanks to a handful of new entrants this year as investors have grown more comfortable with taking advantage of products not linked to traditional, passive, plain-vanilla indexes.

With active management comes higher fees, however, and many of the funds on the market have struggled to justify their price tags since beating the benchmark consistently is no easy task for any portfolio manager. One particular offering from AdvisorShares has defied the odds, managing to beat its benchmark index by a meaningful margin since its inception in late 2011 – meet the TrimTabs Float Shrink ETF (TTFS, C+).

Inside TTFS: What Is Liquidity Theory?

Founded in 1990, TrimTabs Investment Research has since been a leading independent research firm. What separates TrimTabs from the pack is the firm’s compelling Liquidity Theory, an approach that is inherently different from standard equity valuation methods. The underlying premise of Liquidity Theory is that stock prices are a function of liquidity as opposed to value, meaning that prices are ultimately driven by supply and demand [see also 3 Market Valuation Indicators ETF Investors Must Know].

More specifically, this theory contends that stocks should perform best when their number of outstanding shares decreases over the past 120 days; all else being equal, this theory is basic economics because it assumes that if the same amount of money is going after fewer shares, then the share price should increase. TrimTabs also believes that because corporate insiders have better information than the general public, their timing of new stock issuances and share repurchases can offer valuable insights when it comes to spotting and profiting from supply/demand imbalances in the marketplace.

TTFS employs a fundamental filter when following Liquidity Theory. The portfolio managers focus on three things when it comes to stock selection:

  1. Shareholder Friendliness as measured by float shrink – a decreasing number of outstanding shares is better since it hints at supply contracting
  2. Profitability as measured by free cash flow – an increasing cash flow hints at a possible uptick in demand
  3. Solid Balance Sheet as measured by the leverage ratio- a stable leverage ratio coupled with increasing profitability and float shrink is ideal

The TrimTabs approach has been embraced by institutional investors as the firm has a history of providing independent research for some of the world’s biggest hedge funds, mutual funds, sell-side institutions, and high net worth individuals. The resulting TTFS portfolio is well-balanced given that it steers away from traditional market cap-weighting; the fund’s equal-weight approach results in greater exposure to small- and mid-cap companies that would otherwise receive far less attention in traditional plain-vanilla ETFs.

Does Liquidity Theory Work?

Investment theories and backtested results should always be taken with a grain of salt. With that being said, TrimTab’s Liquidity Theory is not just for financial philosophers; TTFS has managed to beat its benchmark, the Russell 3000 Index, since inception by a margin of 4% (as of Q3 2013 – 9/30/2013). From October 4th, 2011 through to the end of September, 2013, TTFS has delivered a gain of 30.31% compared to the Russell 3000′s return of 26.34%.


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TTFS has continued this outperformance over the past one year (as of 12/2/2013), racking up gains of 36% compared to gains of 28% generated by the iShares Russell 3000 ETF (IWV, B+) over the same timeframe [try Head-To-Head ETF Comparison Tool].

The Bottom Line

When all is said and done, every active ETF out there boasts a compelling case often backed by an experienced management team, but few can deliver on their promise of beating the market. The TrimTabs Float Shrink ETF warrants a closer look from anyone looking to steer away from traditional market capitalization-weighted funds and tap into an actively-managed strategy that has managed to deliver superior returns compared to its benchmark.

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Disclosure: No positions at time of writing.