Buyback ETF Beating Market, Dividend Funds

ETF Trends

An actively managed ETF that follows an offbeat strategy based on a company’s shares outstanding is outperforming the S&P 500 and popular dividend funds in 2012.

TrimTabs Float Shrink ETF (TTFS)  is up 14.4% year to date.

“Top insiders at a firm know more about its fundamentals than the investing public. These insiders can influence the price of their employers’ shares by timing equity issuance and stock buybacks to their advantage,” according to a fact sheet on TTFS. “Supply and demand also dictates that stocks should perform best when their float is shrinking. All else being equal, if the same amount of money is chasing a smaller float, then the share price increases. TTFS’ stock selection algorithm is based on this premise.”

Companies can return capital to shareholders in many ways, including dividends and share buybacks.

“Flush with cash and in search of good investments in a world of 0% interest rates, more companies have been slapping buy ratings on their own stocks — which they view as undervalued — at a time when individual investors have been content to play it safe and park their cash in bonds and money market funds,” according to a recent USA Today report. [Some Active ETFs are Outperforming]

Investors have put billions into dividend stocks and ETFs in 2012, despite the fact that they have underperformed the market writes Charles Biderman for Forbes. Biderman is chief executive of TrimTabs, which developed the float shrink strategy.

Float shrink is another other way of using corporate cash to benefit shareholders. By reducing the number of shares outstanding, each of the remaining shareholders owns a bigger piece of the pie. [ETFs That Focus on Share Buybacks]

The ETF’s strategy is also tax efficient, Biderman argues. [New AdvisorShares ETF Based on TrimTabs Research]

The fund is less than a year old, launching in October 2011.

“The fund is loosely based on three quantitative factors: changes in shares outstanding, cash flow, and leverage. The definitions and even the descriptions of the factors in various marketing material provided by the fund company is very limited, so we consider this fund to be more of a black box,” Morningstar says in an analyst report on TTFS. “In the current environment of low interest rates, we think investors should consider strategies that focus on dividend-paying firms or firms that buy back shares.”

PowerShares Buyback Achievers (PKW) is an ETF with a similar strategy.

TrimTabs Float Shrink ETF

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Tisha Guerrero contributed to this article. 

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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