TrimTabs Asset Management has unveiled two new ETFs in partnership with Donoghue Forlines, a tactical investment firm offering risk-managed portfolio solutions.
The funds use proprietary trading signals to shift into defensive assets when the risk of a bearish market is high.
The TrimTabs Donoghue Forlines Risk Managed Innovation ETF (DFNV US) and TrimTabs Donoghue Forlines Tactical High Yield ETF (DFHY US) have listed on Cboe BZX Exchange and come with expense ratios of 0.69% and 0.95%, respectively.
DFNV combines TrimTabs’ flagship cash flow strategy with a focus on highly innovative companies listed in the US, while DFHY provides broad exposure to high-yield bonds.
Both funds seek to protect against market drawdowns by tactically shifting to short or intermediate-term US Treasury ETFs based on trading signals developed by Donoghue Forlines.
John A. Forlines, III, Chief Investment Officer at Donoghue Forlines, commented, “We’ve long made use of ETFs in building tactical, risk-managed solutions for all types of investors, and we’re very pleased to be partnering with TrimTabs Asset Management in bringing these new ETFs to the marketplace.
“We’re confident that investors and advisors will find these differentiated approaches to be extremely useful as they search for opportunities in the equity universe and tactical approaches to navigating fixed income.”
Innovating companies
DFNV tracks the TrimTabs Donoghue Forlines Risk Managed Free Cash Flow Innovation Index.
The index starts with a universe of US-listed common stocks that fall within the 97th percentile by market cap and have average monthly trading values of at least $75 million. Eligible constituents must also have positive free cash flow and research & development (R&D) expenses over the past 12 months.
Each stock is assigned a Free Cash Flow Innovation Score which is determined using several inputs including earnings quality (the proportion of income attributable to certain cash flow activities), profits generated from R&D, R&D investment relative to total assets, asset turnover ratio, and financial leverage. Only companies with scores within the top 25% of all securities will be eligible for inclusion.
A target weighting is then assigned to each security based on a combination of its Free Cash Flow Innovation Score and free-float market capitalization. Companies are ranked based on their target weighting and sequentially included in the index until either 120 securities have been included or 90% of the cumulative security weight has been included. In either case, the remaining weight is distributed proportionally amongst the securities already selected. The equity portfolio is reconstituted and rebalanced quarterly.
During bull market conditions, the ETF is expected to be fully invested in the equity portfolio; however, if Donoghue Forlines’ trading signal indicates a high risk for bearish conditions, the fund will shift half of its assets to short-term Treasury ETFs.
Bob Shea, CEO and CIO of TrimTabs Asset Management, said, “We’re very excited to be launching an ETF designed to capture not only the most innovative companies but specifically that subset of innovators that are simultaneously generating consistent free cash flow, something our research has long found to be a signal of potential outperformance.
“Our proprietary algorithm, which utilizes a free cash flow innovation score in powering this fund, is well complemented by the tactical asset allocation model that our partners at Donoghue Forlines bring to the table.”
High Yield
DFHY, meanwhile, is linked to the TrimTabs Donoghue Forlines Tactical High Yield Index.
The index consists of US-listed ETFs that effectively invest 100% of their assets in bonds rated high yield and do not use factors, hedges, and long/short strategies as part of their investment processes. Eligible ETFs must also have AUM above $1 billion and expense ratios below 0.50%.
The fund includes a similar defensive tactical overlay that will shift 80% of its assets to intermediate-term US Treasuries if the trading signal is bearish.
“Though DFHY is our first fixed income ETF, it fits well with the overall TrimTabs’ approach and philosophy. We’re very pleased to be providing this powerful new tool for investors that can help them take some of the guesswork out of the income sleeve of their respective portfolios,” said Shea.