Trim Tabs Float Shrink ETF: Invest like a CEO

Newish actively managed ETF focuses on insider knowledge, stock buybacks. Photo: Wikimedia commons

WASHINGTON, August 5, 2013 – U.S. and international stock and bond markets have remained consistently treacherous since this country inadvertently kicked off its Great Recession and continuing middle-class Great Depression II beginning roughly in late-2007. 

Almost like clockwork, one investment class or another—bonds, real estate, stocks, and now bonds again—has been nearly obliterated by overwhelming waves of selling that have resembled, at times, the surging zombie hordes in this summer’s semi-successful movie “World War Z.” 

Those investors still left standing in this environment are increasingly wondering what they can do to generate some kind of meaningful portfolio return. Part of the answer might be found in the investment philosophy behind a little known but highly interesting ETF known by the unwieldy name of “TrimTabs Float Shrink (TTFS).” 

The San Francisco Bay area is home to Trim Tabs investment advisors.

Launched in the autumn of 2011, this actively managed ETF is operated and managed by the well-respected Trim Tabs Asset Management, LLC. The philosophy behind this relatively new fund is fairly simple—if you’re a seasoned investor. 

Today’s markets are increasingly under fire for evolving into an elitist financial playground almost exclusively owned and operated by the rich, the very rich, and the politicians and government officials that the wealthy can buy. Known to varying degrees as “insiders,” this investor class, on the whole, is savvy, well-advised, and often in a legitimate position to take advantage of corporate trends to enhance not only their own but their companies’ investment results as well. 

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Trim Tabs management reasons that since these insiders know more about their companies than the general public, they’re also in a position to influence the price of company shares by carefully calibrating not only the issuance of new shares but also stock “buybacks” which serve to “shrink” the existing “float” or number of shares available to the public. In other words, by buying back shares of their own company stock at discreet and timely intervals, there are less shares to go around to interested investors, decreasing the supply of shares while increasing, theoretically at least, the value of the remaining supply. 

At the same time, with less shares available, company earnings per share almost automatically increase, making the shares more desirable for investors to purchase. It’s classic supply and demand and it works in favor of investors who hold such shares.

Since ultimately, it’s supply and demand that really drives the pricing of stocks, companies that reduce their share “float”—i.e., the number of shares outstanding—help make them more desirable to investors. And this is the primary reasoning behind Trim Tabs’ choice to invest in an actively managed portfolio of such shares in TTFS 

Shrinking the float, however, is not the only criterion Trim Tabs uses to construct its portfolio in this ETF. They further trim the list of eligible stocks in this list by focusing on companies that repurchase their own shares with available cash (free cash flow) rather than financing buybacks by borrowing money (leverage). 

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The company then combines these three criteria into a score that’s matched against the large Russell 3000 Index that represents, percentage-wise, nearly the entirety of the U.S. investible market. TTFS then invests in those stocks from their list that are likely to beat this average on a consistent basis. 

All this can be summed up in a singular, popular cliché: If you can’t beat ‘em, join ‘em. In other words, insiders know what they’re doing most of the time, which is why they and their companies can consistently beat the returns of the average investor or portfolio manager. 

TTFS attempts to approximate this insider expertise in its managed portfolio, thus hoping to deliver a superior return, which, thus far in its short life, it has. The ETF has boasted an approximately 30% return to date since its inception in October 2011. Better yet, it pays a small annual dividend at year-end as well. 

Here’s Trim Tabs’ Charles Biderman on CNBC, explaining it all to you:

This is a relatively small ETF at present, with holdings currently valued at around $54.4M as of last quarter. Trading is light as well, with an average daily volume of around only 35,000 shares traded, which can lead to a moderately wide bid-ask spread. 

As always, as in life, nothing is guaranteed in TTFS, nor in any other ETF or mutual fund for that matter. 

That said, investors have known for years that corporate insiders, given their intimate knowledge of their own companies, often generate superior investment performance for themselves and their shareholders. The criteria of TTFS means to capture some of that expertise and put it to work for the average Joe Investor who could certainly use some help in a market that’s increasingly dominated by slick traders, manipulators, and high-frequency traders. 

This week’s markets: 

Look for some drift on Wall Street this week. Summer vacation is still upon us and many investors are now holding back due to the ongoing terrorist high alert that will continue, at least for certain countries and embassies, for at least another week. If something serious actually does happen, the market is likely to crash for a day or two at least, although oil and energy stocks, weak last week, could get a big, instinctive kick upstairs. 

Otherwise, aside from plus side action here and there, we’d look for markets to meander throughout much of August with, perhaps, a downside bias as traders also contemplate the Fed’s Hamlet-like stance on “tapering” QE. 

In other words, the market environment will continue to be maddeningly complex this month. 

Column note: We’re trimming the frequency of this column down to once per week, punctuated by an occasional special column should the occasion arise. 

We’ve come to the regretful conclusion that many investors, stung by the events of the last few years that in many cases irretrievably damaged their portfolios, have left the market never to return. In the meantime, they’ve not been replaced by members of the younger generation who have discovered they have to devote most of their energy to actually finding a job in this environment. 

All of this means that a daily general stock market column focused on individual trading may very well not be of much use anymore to today’s demographic. For that reason, as we move ahead, we’ll try to address this change by offering one interesting investment idea per week plus a weekly outlook on what markets are likely to do. 

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He currently owns small positions in TTFS, mentioned above.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17

This article is the copyrighted property of the writer and Communities @ Written permission must be obtained before reprint in online or print media. REPRINTING TWTC CONTENT WITHOUT PERMISSION AND/OR PAYMENT IS THEFT AND PUNISHABLE BY LAW.

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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  



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