Stock buybacks — they’re one of Wall Street’s most hotly contested games, but for the past few years, they’ve also been powering one of Wall Street’s better-performing funds.
The blandly named TrimTabs Float Shrink ETF (NYSEARCA:TTFS) from AdvisorShares has done its talking with its returns since hitting the markets in 2011, more than doubling during that time to beat the broader market by some 25 percentage points.
And while you might not agree with whether share repurchases are the best use of a company’s cash, or how honest earnings numbers are when stock buybacks are liberally applied, they’re very much at their best when viewed through TTFS’ lenses.
Stock Buybacks: Why We Love ‘Em, Why We Hate ‘Em
The stock buyback debate has two pretty vocal camps.
On one hand, you’ve got investors who tout the simple math: Fewer shares on the market means more value in the shares you own. Plus, they help artificially juice that all-important earnings per share number. After all, if you’ve got fewer shares to divide by, you’ll get a bigger number.
In the other camp, you’ve got naysayers with plenty of objections. InvestorPlace’s Will Ashworth has looked at several common arguments: That cash is better spent on dividends. Companies are poor market timers. And that P/E benefit … well, everyone knows it’s just a lie.
Still, painting it with a broad brush, buybacks do help performance. From a 2014 Wall Street Journal report:
“Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by Barclays PLC.
‘There are a couple of reasons why companies do buybacks,’ said Jonathan Glionna, head of U.S. equity strategy at Barclays. ‘One is that it seems to work; it makes stocks go up.’
So … Why TTFS?
The TrimTabs Float Shrink ETF does exactly that — it scans the Russell 3000 for companies that shrink their float (shares that investors can trade). However, TTFS doesn’t limit the search to only companies that do so via stock buybacks; it also can invest in firms that shrink their float via venture capital activists (who typically buy large stakes, hold them for a long time and influence decision-making) or spinoffs (another popular way of enhancing shareholder value).
The worry about buybacks coming “at the top” misses the point that buybacks are only really effective for a couple of quarters unless continued. Thus, the Float Shrink ETF managers replace about 20 to 25 companies a month.
And there are two other important factors TTFS includes when evaluating potential holdings. From the TTFS white paper on float shrink:
- Free cash flow: We want to invest in companies that shrink the float because their underlying business is profitable, not because they are divesting assets.
- Leverage: We do not want to invest in companies that simply swap equity for debt. Such exchanges do not add real value because the risk of equity capital rises when the proportion of debt capital grows.
Much like other ETFs, which include things like average daily volume, earnings and other factors for quality control, TTFS uses these filters to make sure its holdings are performing stock buybacks … well, the right way.
The result? A fund that leans fairly large-cap heavy, with cash-flow-happy holdings such as Yum! Brands, Inc. (NYSE:YUM) and Western Refining, Inc. (NYSE:WNR). It also has a good sector spread, with financials, industrials, tech, healthcare, staples and discretionaries each accounting for at least 10% of the fund.
And something I especially like: TTFS is an equal-weight ETF. All of its 100 holdings are weighted right around 1% (Top holding WNR is a whopping 1.11% of the fund). That means if the fund’s screeners completely get it wrong on a particular stock, it’ll have a slight drag on the fund — but it won’t send it plunging into the ground.
No, this is a balanced bet on stock buybacks, and an increasingly popular one, too. TTFS took more than two years to reach $100 million in assets under management, but as eclipsed the $200 million mark in roughly half that time. Moreover, its performance has been good enough to earn a Morningstar five-star rating.
The cost for quality is fairly steep here, as TTFS charges 0.99% in expenses, or $99 annually for every $10,000 invested. However, given that this isn’t just a basic index fund, but an actively managed fund, that’s to be expected.
And in TTFS’ case, it’s worth it. When it comes to individual holdings, I’d sure prefer to see the hard cash of a dividend in my account so I can reinvest as I please. But so far, this fund has proven that more often than not, it can identify companies that will get some bang for their buyback buck.
I wouldn’t go so far as to make TTFS a core portfolio holding, but if you’re looking for another avenue for growth, TTFS fits the bill.
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