One-year-old ETF beats hedge funds, stock market in first year

Date: Wednesday, October 17, 2012
Author: Katya Wachtel, Reuters

A one-year-old actively managed exchange-traded stock fund has beaten a number of market benchmarks in its first year, including most hedge funds, the ETF sponsor AdvisorShares said on Tuesday.

Through September 30, the TrimTabs Float Shrink ETF gained 35.14 percent since it launched on October 4 last year, beating the benchmark Russell 3000 Index, which rose 32.85 percent over the same period, as well as the S&P 500 index.

The TrimTabs ETF also beat yearly gains for the benchmark HFRI Fund Weighted Composite Index, which rose 4.7 percent through September and tracks the performance of the $2 trillion hedge fund industry.

The TrimTabs ETF portfolio is composed of the stocks of 100 companies that are actively buying back their own shares, and which have positive and growing free cash flow.

ETFs are baskets of securities like mutual funds, but they trade throughout the day like individual securities. Advocates say they offer investors stock market exposure with better liquidity terms and a cheaper price than other investment vehicles, like hedge funds.

Criticisms that hedge funds are too pricey and illiquid have gained traction this year as the industry, which lost money last year, has gained only about 5 percent on average through September. It trails the S&P 500 Stock Index, which rose 16.43 percent over the same period.

The hedge fund industry's underperformance over the past two years raises questions about whether it makes sense for institutional investors to pay hefty fees to hedge fund managers when they can get the same, if not better, returns by buying shares of low-cost index funds. Unlike most other portfolios, hedge funds take a management fee, plus a performance fee that is often 20 percent or more.

Some hedge fund strategies have performed better than others.

Emerging market-focused funds climbed almost 8 percent through September. Some fixed income-focused hedge funds, like those that specialize in securitized credit, rose 12 percent for the year, while mortgage-backed securities funds gained 10.67 percent. [ID:nL1E8KJJNR]

Still, that performance trails the more than 35 percent gains of the TrimTabs ETF.

At The Big Picture investment conference in New York recently, financial research analyst Michael Belkin said hedge fund returns could be replicated with portfolios composed of investments in ETFs and treasury bills.

TTFS is managed by investment adviser TrimTabs Asset Management.