Amid Rising Repurchases, Are Buyback ETFs Worth A Look?
There really is a niche ETF for almost any occasion. Insider buying, social media, patent-rich companies, convertible securities. You name a unique or obscure investment concept, and there's a fair chance there's an ETF way of playing it.
Same goes for share buybacks. This particular niche is controlled by the PowerShares Buyback Achievers Portfolio (NYSE: PKW) and the newly minted, actively managed AdvisorShares TrimTabs Float Shrink ETF (NYSE: TTFS).
The question is with buybacks on the rise, should investors be considering these ETFs as valid portfolio additions? The answer isn't as black and white as it might appear at first glance.
First, the efficacy of buybacks as real shareholder rewards needs to be examined. Buybacks are on the rise, we know that much. From a recent Wall Street Journal piece on the subject: Among companies in the Standard & Poor's 500-stock index, repurchase spending totaled at least $437 billion last year, a 46% increase from 2010, estimates Howard Silverblatt, senior index analyst at S&P.
The rise in buybacks might explain why the PowerShares Buyback Achievers Portfolio, which is home to nearly 140 stocks, was up 4% year-to-date heading into the start of trading today. That ETF is home to some marquee share repurchasers such as Amgen (Nasdaq: AMGN) and Dow components Wal-Mart (NYSE: WMT) and International Business Machines (NYSE: IBM).
The AdvisorShares TrimTabs Float Shrink ETF, which debutted in October 2011, has done even better, gaining almost 7% year-to-date before Monday's opening bell rang. AdvisorShares lays out a sound thesis behind TTFS: "The Portfolio Manager believes that stocks should perform best when their outstanding shares decrease over the past 120 days (float shrink.) All else being equal, if the same amount of money is chasing a smaller number of shares, then the share price increases. Corporate insiders have better information than the general public, which allows them to time their issuance and repurchases of stock."
TTFS is home to 100 stocks inlcuding Amgen and Home Depot (NYSE: HD), but as an actively managed ETF, it has an expense ratio of 0.99% and large-caps account for just 17% of the portfolio's current composition.
Arguably, buybacks aren't the reward for investors that dividends are and undeniably, many companies are bad at timing repurchases of their own stock. David Templeton points to Exxon Mobil (NYSE: XOM) as one example and a chart featured by the Journal notes buybacks were soaring during the market top of 2007, but plunged during the financial crisis.
IBM has been cited as one company adept at getting good value for its own stock. However, ConocoPhillips (NYSE: COP) and Netflix (Nasdaq: NFLX) are just two more big names that can be accused of overpaying for their own shares.
Maybe it's the perception that buybacks are good things that is driving the returns of ETFs such as PKW and TTFS. The reality is when accounting for high expense ratios (PKW's is 0.7%), the performance of TTFS becomes much closer to that of the SPDR S&P 500 (NYSE: SPY) and the lag between PKW and SPY grows even larger. That's right, even with buybacks surging, a buyback ETF has been outperformed by a standard low-cost index fund. And that might be all anyone needs to know about buyback ETFs.
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