How We Define Capital Efficency

Capital Efficiency is how well a company invests its money. 

Are they spending their capital to grow revenue compared to how much they are getting in return in profits? In other words, are they spending money to make money?   

TMFE uses the Capital Efficiency metric to measure a business’s fundamentals and quality. When solid and transparent companies make smart decisions with their capital, we believe they deliver meaningful returns to long-term investors like you – not to mention value to their customers and the U.S. economy at large.

So what’s the formula to separate valuable, profitable companies from the rest? 

It’s a million-dollar question analysts have debated for years. 

A lot of researchers might tell you that “quality” comes down to gross profitability – the amount a business earns, minus what they spend to sell or make their products/services.

TMFE goes several meaningful steps further by following the proprietary formula created by The Motley Fool, LLC Investing Intelligence Team. They’ve created an index using a “Capital Efficiency score” based on three precise factors:

Profitability

Is it high or low?
A company should generate high returns on assets to be considered high-quality.

Growth

Is it trending in the right direction?
When it comes to the direction of profitability, the trend is your friend.

Stability

Is it consistent?
The market will always go up and down. If a company has a track record of growth year over year, in spite of rough patches, we think it often reflects their strategic ability to overcome challenges. We believe in companies with historical staying-power.

We Believe Well-Run Companies Make The Smartest Investments

Many businesses proudly show off their sparkly exterior to the world, but only some are genuinely high-quality underneath.

Capital Efficiency, to us, is one of the best metrics to find out what’s under the hood.

These are all traits that The Motley Fool, LLC analysts prize when picking stocks – they’re the sorts of companies we think could potentially drive significant returns for investors like you.

Empty talk can only take a company so far. A sustained track record on the other hand? That’s what makes a great foundation for a long-term portfolio, in our opinion.

Flashy stocks won’t cut it. 

All of us have heard horror stories about companies like WeWork,* whose failed corporate governance, shaky business models, insurmountable debt, and too-rapid expansion proved they were nothing more than trendy and pushed them into bankruptcy. 

We feel they don’t have what it takes to continue growing sustainably.

These kinds of businesses have been through the dot com crash, the Great Recession, COVID, interest rate hikes, and more. And unlike stodgy companies that rest on their laurels, they adapt to the needs of their customers and find new ways to deliver value. The ones with true staying-power keep innovating, changing, and growing.

They continue to re-invest
and re-invent themselves.

Some capital-efficient companies build their success through popularity and brand loyalty, while others quietly keep the world running. You might not have heard their names, but you rely on them every day – they power your phone lines, manufacture your medical products, and host the website domains you visit on a daily basis. 

What they all have in common is that they know how to operate efficiently and generate returns over any considerable time period. 

We believe they could do the same for your long-term portfolio.

Holdings What's in this Fund?

By now you’re probably wondering, so what are these elite companies who’ve passed all three layers of the strict Quality score to be included in The Motley Fool Capital Efficiency 100 Index ETF?

While you might suspect we’d keep this proprietary information tightly under wraps, the truth is that our positions are no secret at all! We don’t mind telling you exactly what holdings make up this ETF… Just follow the link below to see the full list.

Performance Does this thing actually work?

In addition to our entire list of holdings, we are also proud to show you exactly how this fund has performed since its inception. Click below to view TMFE's performance.

Where does TMFE fit into your portfolio?

Our Portfolio Managers believe that factor exposure, through a smart beta fund like TMFE, should set you up for greater potential than a generic market-cap weighted fund like the S&P 500. 

When you invest in the S&P 500, you’re far more invested in the top megastocks, known as the “Magnificent 7”, than you are in the remaining 493. If one of the giants falls, that portion of the fund falls with it. 

Plus, if you’re invested in several generic market-cap weighted funds, you might be holding even MORE excess shares in just a few companies than you realize. Not to mention, hundreds of the remaining companies could be weighing you down when you could opt for vetted quality instead.

If the S&P 500 is a heavy bulldozer, we see TMFE like trusty jumper cables. You wouldn’t want your mechanic to take a bulldozer to your car when all you needed was to jumpstart the battery, right? 

The goal of TMFE is to dial in on quality, using the 3-step process like a precise tool to create what we believe is a higher-quality fund – made available in one convenient, cost-effective package. 

Our recommendation is to add TMFE to your brokerage account or your retirement account and hold on to it long-term to allow capital-efficient companies to work on your behalf, giving you the potential for compounding returns.