Today three firms are unveiling ETFs. TrimTabs is launching an ETF that is focused on free cash flow, while U.S. Global Investors is looking to offer a unique twist on precious metals-related equities. And Virtus is launching an ETF that offers inverse exposure to the U.S. market.
TrimTabs’ Free Cash Flow Fund
The TrimTabs All Cap International Free-Cash-Flow ETF (TTAI) is a companion to the $26 million U.S.-focused TrimTabs Float Shrink ETF (TTAC). Both funds are actively managed and focus on firms with decreasing outstanding shares, increasing free cash flow and decreasing leverage.
TTAI comes with an expense ratio of 0.59% and lists on the Bats exchange, which is owned by ETF.com's parent company, CBOE.
“We believe good long-term returns which are equal or better than the market returns, without taking a lot more risk, accrue to companies that are higher quality,” said TrimTabs CIO Ted Theodore. He notes that the investment process for TTAI is the same as the one for TTAC.
“When used in conjunction with one another, TTAI and TTAC will allow investors to customize their domestic and international free cash flow exposure, all within one product suite,” said Charles Biderman, TrimTabs’ founder.
A Quantitative Process
The new fund draws its holdings from developed non-U.S. markets and has no restrictions in terms of market-cap size. It uses a quantitative methodology to select stocks falling into the top decile of the universe based on a score derived from an algorithm that incorporates the past six months of data relating to shares outstanding, free cash flow and leverage for each stock.
“Free cash flow is an extremely powerful, useful metric when it comes to evaluating a company,” Biderman said. A press release from the company noted that free cash flow is less susceptible to “financial gimmickry” than other numbers reported by companies, such as earnings, sales, assets and liabilities.
According to the prospectus, the fund normally holds 80 to 120 stocks selected from that top decile.
“We think the active element, even though it’s quantitative, is like the pilot in an airplane, and mostly it’s on autopilot. But occasionally you’d better have a pilot,” said Theodore of the firm’s decision to use an active strategy. “Our experience has been that having that ability to respond a little bit more quickly as opposed to every month or quarterly rebalance is pretty important.”
He points out that the shares-outstanding metric can change daily, while the other two metrics are updated quarterly. The active management aspect also allows TrimTabs more freedom to harvest gains in the immediate wake of an acquisition announcement, to monitor turnover and sector allocations and to manage the tax consequences within the portfolio, Theodore says.