ETF Edge

This buyback-focused ETF is beating the market—here's how

Getting in on the buyback boom

The recent buyback boom might have investors looking for ways to cash in.

Enter the TrimTabs All Cap U.S. Free-Cash-Flow ETF, ticker TTAC, an equal-weighted, exchange-traded fund that's focused on investing in what TrimTabs sees as high-quality companies with share buyback programs.

This 100-stock ETF, which counts the stocks of Deckers Outdoor Corp., Illumina and Zoetis among its top holdings, aims to generate alpha — Wall Street talk for outsized gains — over the major averages. And so far, it's been doing just that, with a 19% gain so far this year versus the 17% return.

"We think there are good buybacks and bad buybacks," Janet Johnston, portfolio manager at TrimTabs, told CNBC's "ETF Edge" on Monday. "We like the companies that have organic growth — so, they have free cash flow growth — and we also look at their balance sheets to see how leveraged they are, if they're improving or not. And those are the buybacks that tend to deliver alpha."

TrimTabs' criteria for its holdings differ from other buyback focused ETFs like Invesco BuyBack Achievers ETF, ticker PKW, which invests in companies that have reduced their share count by at least 5% in the past year, Johnston said. Companies typically authorize share buyback programs in the interest of rewarding shareholders and boosting earnings per share.

Instead, TrimTabs' fund focuses on real-time reductions, also taking into consideration the underlying companies' profitability, organic growth and balance sheet strength, she said.

"We think that not all buybacks lead to riches," Johnston said, adding that she's "a big fan of moats, so we're also looking for other protective layers to add" in the face of headline crises.

ETF experts Andrew McOrmond, managing director of the ETF group at WallachBeth Capital, and Nick Colas, co-founder of DataTrek Research, liked TrimTabs' strategy.

"I actually think you have a chance to have a new kind of category in investing" that plays on both value and growth, McOrmond said in the same "ETF Edge" interview. "Maybe this can be the new kind of value."

Acknowledging the earnings-per-share boosts that buybacks can provide, Colas also liked the other side of the trade: the benefit to the shareholder.

"More than anything, it shows respect for the shareholder. A buyback shows the company's just not going to waste capital on M&A or a bad investment, they really value shareholder capital and they will hand it back when they can't use it," he said Monday on "ETF Edge."

Big banks J.P. Morgan Chase, Goldman Sachs and others boosted their share buyback programs this week after passing the Federal Reserve's stress tests, annual procedures meant to gauge the organizations' preparedness for a financial crisis. Buybacks have aided in the stock market's climb this year as a shrinking pool of shares has driven prices higher.