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.
A Different Take On A Popular Space
The U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU) offers a new twist on what essentially amounts to the gold miners space but can include producers of platinum, palladium and silver as well. U.S. Global Investors is also known for the US Global Jets ETF (JETS), which has $102 million in assets under management and covers the airline industry.
GOAU has an expense ratio of 0.60% and lists on the NYSE Arca.
According to a fact sheet from U.S. Global, the fund specifically targets royalty or streaming companies operating in the precious metals space. Such companies provide capital that funds the exploration and production projects of precious metals producers, and in return receive either royalties or a “stream” of the precious metals at a below-market price. The main advantage of this is that the royalty and streaming companies do not have much in the way of operating costs, as it is the producers who must maintain the infrastructure of a mining operation.
“They have unique fundamental factors that truly differentiate them from the gold stocks,” said Frank Holmes, CEO and chief investment officer of U.S. Global Investors. He points out the royalty firms’ outsized revenue per employee ratios compared to traditional gold mining companies; a U.S. Global Investors document indicates that Wheaton, one of GOAU’s top holdings, generates $25.8 million per employee compared with less than $400,000 per employee for traditional gold mining companies like Barrick and Newmont.
The same document also cites data indicating that royalty companies offer more revenue-per-share growth, higher rates of dividend growth and lower debt levels than traditional precious metals companies.
A 4-Tiered Approach
Eligible companies must derive at least half of their aggregate revenue from mining and production activities or the funding of such activities. Companies’ stocks or ADRs must be listed on an exchange in one of six countries: Australia, Canada, Hong Kong, South Africa, the United Kingdom or the United States. They must also meet requirements regarding minimum liquidity and permissible levels of debt, according to the prospectus.
Priority is given to companies with the highest revenue-per-employee levels, with those firms scored based on revenues and operating cash flow per employee and on gross margin. Companies not classified as priority are scored based on their operating-cash-flow-to-enterprise-value ratio, the prospectus said.
There are generally 28 component companies in the index that are sorted into tiers based on their scores and other criteria. Tier 1 consists of the three top-scoring companies listed in the U.S. or Canada that derive more than 50% of their revenue from silver or gold and have a market capitalization of at least $1 billion. Each of the three companies is weighted at 10% of the total index.
Tier 2 consists of five companies weighted at 4% each. They are chosen based on their fundamental factor scores and can be listed in the U.S., Canada, Australia, South Africa or the United Kingdom. Each must have a market capitalization of at least $400 million.
Tier 3 covers 10 securities weighted at 3% each. They are chosen, based on their scores, from the same countries mentioned for Tier 2, but the minimum market-cap requirement is $300 million. Finally, Tier 4 includes 10 companies listed outside of the U.S. and Canada that are selected based on their scores and weighted at 2% each, with a minimum market-cap requirement of $200 million, the prospectus said.
Virtus Rolls Out Inverse Exposure Fund
Virtus is launching an ETF that will offer inverse exposure to the U.S. large-cap equity space. The actively managed Virtus Enhanced Short U.S. Equity ETF (VESH) is able to sell futures contracts on the S&P 500 and its sector subindexes, and to engage in short sales of U.S. equity securities and U.S. equity ETFs.
The fund lists on the NYSE Arca and comes with an expense ratio of 0.55%.
According to the prospectus, VESH is managed by subadvisor Rampart Investment Management, which uses a quantitative strategy. Rampart relies on its research and analysis to overweight and underweight sectors with adjustments to the portfolio anticipated on a quarterly basis.
Contact Heather Bell at [email protected].