3 Viewpoints On A Newly Minted 5-Star ETF

An actively managed ETF, ‘TTFS,’ marks its three-year anniversary with mixed results.

An ETF hit its three-year anniversary recently, an important milestone for any fund. The AdvisorShares TrimTabs Float Shrink ETF (TTFS | C-76) has had success in its first three years: building a decent asset base, establishing workable liquidity and delivering strong returns relative to the market.

Still, three perspectives on the fund—two from ratings providers and one derived from the fund’s objectives—differ significantly.

The Pundits’ Views

Upon its three-year mark, the fund has earned five out of five stars from Morningstar.  This means the ETF  has outperformed its peers on a risk-adjusted basis over the past three years per Morningstar’s methodology.

Here at ETF.com, TTFS’ ranking is C-76.  The letter grade measures the costs and risks of fund ownership, along with liquidity. TTFS’s letter grade (C on an A-F scale) suffers mostly because of its fee of 99 basis points, or $99 for each $10,000 invested. That’s quite high for a U.S. equity ETF, even if it’s on par with some active mutual funds.

The “76” part of the score—which we call its “Fit” score—means the fund’s performance and holdings don’t align well with a marketlike benchmark.

The Fit score is similar to active share except that a high Fit score implies “less active” and a low score means “more active.” Since TTFS aims to beat, rather than match, the market, a 76 out of 100 means it’s no “closet indexer” and indeed makes some significant bets away from the market.

The Fund’s Own Goals

Rankings aside, TTFS clearly states its own performance goals relative to a benchmark. It aims for “long-term returns in excess of the total return of the Russell 3000 Index, with less volatility than the Index,” to quote the fund’s home page.

With three years of history, has the fund met its two stated goals?

The answer is yes to the first goal: TTFS beat its benchmark handily. I’m using the iShares Russell 3000 ETF (IWV | A-100) as an investable proxy for the Russell 3000 Index. TTFS has annualized returns of 21.3 percent in the past three years, or 2.4 percentage points more than IWV. And that’s net of the high fee I mentioned above.

Data: ETF.com. Total return NAV. 3-year daily log returns. 11/4/2011 - 11/5/2014. Returns annualized. Volatility is standard deviation of daily returns, annualized.

However, the fund misses on the second goal. It has slightly higher volatility than IWV, at 13.8 percent versus 13.0 percent, respectively. That’s hardly an embarrassment, but it’s not meeting the goal of less risk, either.

Three Sides To The Story

All three of these viewpoints have merit. A five-star rating from Morningstar reflects strong, if backward-looking, performance against its peers. A lukewarm letter grade from ETF.com highlights a hefty fee in this case, while a middling Fit score means that the fund’s performance is likely to diverge from the market going forward—for better or worse.

Regarding the fund’s own aims, many active ETFs don’t even bother to state an explicit performance goal to a benchmark. TTFS hit its returns goal and came close to its risk goal—I’d call that decent performance, given that higher returns with lower risk are extremely difficult to achieve in the long run.

At the time of writing, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected].