There is a reason that insider trading is illegal. It gives investors with access to important information an unfair advantage. While insider trading may be illegal, investing alongside companies and their insiders is not. What used to be a cumbersome process has now been revolutionized, like so many investor strategies, thanks to ETF's. Today we profile three ETF's designed to give investors an opportunity to invest alongside companies and their insiders.
The first ETF we would like to profile is the PowerShares Buyback Achievers Portfolio (PKW), an ETF that tracks an index of companies that have bought back at least 5% of their outstanding stock over the past 12 months. Essentially, the fund is betting that it is better to invest alongside corporations than against them. And since the fund began trading in December 2006, this strategy has worked. The ETF has advanced 2.74%, as the S&P 500 has declined over 14%.
Currently, the fund's top holdings include Walmart (WMT), IBM (IBM), Bristol-Myers (BMY), and Amgen (AMGN). This fund does not focus on any one sector or industry, giving it a level of diversification usually seen in an index fund, but with much more support. The fund is supported by continuous corporate buybacks, essentially guaranteeing that someone will always be buying the ETF's underlying stocks. As the chart above shows, the fund largely moves in lockstep with the S&P 500, but just a bit above it, given its focus on companies constantly buying back their stock. Its current expense ratio of 0.7% (one that could increase after August 31, 2012 when a fee waiver expires), is a reasonable expense for investors looking for a unique variation of an index fund.
The second ETF we would like to profile is a very unique creation. The Guggenheim Insider Sentiment ETF (NFO) is an ETF that tracks a basket of 100 stocks that have favorable insider buying trends. This ETF believes in the idea that no one knows a company like its executives, and that if they are personally buying their stock, investors should as well. For a CEO to use company cash to buy back stock is one thing. But for him or her to use their own cash to purchase the stock is something else entirely, Guggenheim argues. And their argument has so far been correct. Since inception in September 2006, this ETF has dramatically outperformed the market, advancing over 21% as the S&P 500 fell nearly 9%.
Investors critical of a company often look for the track record of management's buying and selling of the stock, and often take insider selling as a red flag. Conversely, insider buying should be a positive, since executives are risking personal wealth in buying their stock. Given that they are under no obligation to do so, the choice to actively buy stock, not simply cash in stock options, should be seen as a bullish sign. Insiders rarely, if ever, buy stock simply to buy it. They buy based on their belief that the stock price will be higher in the future. The ETF currently has an expense ratio of 0.83% (capped at 0.6% until the end of 2013), and this is a very reasonable level given this funds strong performance and investing strategy.
The third and final ETF we wish to profile is one of the newest ETF's on the market. The TrimTabs Float Shrink ETF (TTFS) is an ETF based on the innovative research of TrimTabs, which has researched the connections between stock liquidity and long term performance. TrimTabs has built a great track record of seeing stock prices as a function of supply and demand rather than value. The fund invests in stocks whose floats have shrunk over the past 4 months, believing that if the same amount of money chases a smaller amount of shares, the share price will rise. To the managers, the laws of supply and demand dictate that for a given company, if the only factor that changes is that the amount of available shares is reduced, the share price will rise. TrimTabs manages this ETF for AdvisorShares, a boutique ETF firm, selecting the top 100 stocks from a proprietary algorithm that factors in liquidity, profitability, and financials. The company invests only in companies that shrink their float via existing cash and cash flows, not with debt offerings. The managers, like those of the PoweShares Buyback Achievers Portfolio believe that no one knows a company quite like the company itself, and that the public should invest alongside companies. This ETF launched in October, and has held up well through the market slide. Since inception, the ETF has risen by 3.75%. Although it has underperformed the S&P 500, which has risen 6.33%, we think there is a reasonable explanation for this.
This ETF has under $5 million in assets, and it has not yet reached full liquidity. We are confident that over time, this ETF will begin to trade more in line with its fundamentals and strategy as assets under management rise. The expense ratio, currently capped at 0.99% until May 31, 2012, (the ETF has a gross expense ratio of 1.29%) should be a worthwhile expense to invest in an innovative stargetgy such as this one.
Styve Wynn, one of the most successful hoteliers in the industry, says that "the only way to win in a casino is to own one." If you believe that the market is stacked against the average investor in favor of companies and their insiders, than these 3 ETF's allow you to invest right alongside them. If they choose to buy their stock, shouldn't you? If you see the market as a casino, you must work to get an advantage wherever you can. And few things are more advantageous than investing alongside corporations and their insiders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.