Buyback ETF Defies Logic
Many investors prefer dividends as a way of being compensated by corporate management, but cash-rich U.S. companies have not been shy about repurchasing their own shares.
U.S. companies repurchased nearly $98 billion of their own shares in the first quarter.
Moreover, at the current pace, buyback authorizations could reach $833 billion this year, the best year since 2007 when $863 billion worth of buybacks were authorized, according to MarketWatch. All of this should be very good news indeed for the PowerShares Buyback Achiever Portfolio (NYSE: PKW).
It has been. The PowerShares Buyback Achiever Portfolio is up 30.4 percent year-to-date, trouncing the S&P 500 by 940 basis points. However, this is nothing as the NASDAQ Buyback Achievers Index, PKW's underlying index, has throttled the S&P 500 over the past year, three years and five years. To top it all of, PKW has raked in almost $739 million in assets this year, helping the fund cross the illustrious $1 billion in AUM mark.
Of the roughly 80 ETFs in the PowerShares lineup, only the PowerShares Senior Loan Portfolio (NYSE: BKLN), the PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV) and the PowerShares QQQ (NASDAQ: QQQ) have attracted more assets this year than PKW.
Related: Three Market-Based ETFs Trouncing SPY.
The NASDAQ Buyback Achievers Index is comprised of U.S. companies that have repurchased five percent of their shares over the trailing 12 months. While that is a backward looking strategy, it is one that has obviously served PKW and its investors quite fell. In fact, it can be said that PKW has defied buyback logic.
Consider this: Of the 10 largest authorizations announced in the first quarter, a group that includes five members of the Dow Jones Industrial Average, none of those companies are found in PKW's lineup. Alright, so one can quibble over the fact that new authorizations may not be immediately included in the ETF because PKW is not actively managed and only holds companies that have repurchased five percent or more of their shares over the trailing one-year period.
Still, it should be remembered that some new authorizations are additions to existing to buyback plans. Either way, PKW has outperformed all 10 of top authorizers from the first quarter.
At the end of the first quarter, only the health care and telecom sectors showed year-over-year growth in buybacks with most of the growth in telecom share repurchases coming courtesy of AT&T (NYSE: T), according to Factset data. PKW only has a scant 0.02 percent weight to the telecom sector and it is not to AT&T.
As for health care, PKW does have an almost 12.4 percent to that sector, but the ETF is not heavy on health care names, such as Johnson & Johnson (NYSE: JNJ), that are traditionally thought of as voracious share repurchasers. At almost five percent, Amgen (NASDAQ: AMGN) is PKW's largest health care holding, though new drug approvals and robust pipelines have been the primary catalysts driving biotech stocks higher this year. That is not to say buybacks have not helped, but buybacks are not the main match that ignited this year's biotech fire.
In the first quarter, technology lead all sectors with $17.2 billion in share repurchases while financial services lead in sequential and year-over-year growth, according to Factset. Visa (NYSE: V) was one of the leaders having repurchased $1.7 billion of its own shares in the first quarter, but that stock is not even found in PKW and the ETF has been the superior bet as Visa is up "just" 19 percent this year.
Dow component J.P. Morgan Chase (NYSE: JPM) repurchased $2.6 billion worth of its own shares in the first quarter, Factset points out. That stock is not found in PKW, either. PKW is not bereft of familiar financial services names. American International Group (NYSE: AIG), State Street (NYSE: STT) and Travelers (NYSE: TRV) combine for almost 8.5 percent of the fund's weight.
However, the ETF is short on banks and brokers and heavy on insurance stocks. Insurance stocks have been among the strongest financial services performers this year. AIG's 33.1 percent year-to-date gain proves as much.
As for tech, Oracle (NYSE: ORCL) is PKW's larges holding in that sector. The enterprise software giant has repurchased over $11 billion of its own stock over the past year, but the shares are up just 5.7 percent in the that time. PKW is up 38.4 percent over the same time.
Year-to-date, only three of PKW's top-10 holdings have outperformed the ETF – AIG, Viacom (NASDAQ: VIAB) and Twenty-First Century Fox (NASDAQ: FOXA) – indicating that when it comes to buybacks, an ETF can be the better bet than stock-picking.
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