The Benefits Of A Buyback ETF

Earlier this month, Goldman Sachs said corporate buybacks are, at the moment, the only source of demand for U.S. stocks.

That is not a bullish statement, but S&P 500 companies remain enthused by their own shares. In the fourth quarter, measured as November through January, share repurchases rose 5.2 percent to $136.6 billion on a year-over-year basis, according to FactSet. The research firm notes that last year, there were 70 activist-driven buyback campaigns, the highest total in a decade.

A Look At PKW

Investors looking to participate in the buyback binge have some exchange-traded funds to choose from, including the PowerShares BuyBack Achievers Fund (ETF) (NYSE: PKW). The $1.68 billion PKW is largest dedicated buyback ETF. Last year, the ETF fell 4.3 percent while the S&P 500 posted a modest increase, marking just the third time since 2009 that the buyback fund trailed the benchmark U.S. equity index.

Still, PKW's long-term track record is impressive, as is the potency of buyback announcements.

“Consider also that the shares of companies that repurchase stock have tended to outperform and exhibit lower volatility than the broader market. In fact, studies show that buyback announcements have historically led to a 3 percent jump in stock price on average, and that the subsequent average buy-and-hold return over four years was 12 percent,” according to PowerShares.

To gain entry into PKW's underlying index, the NASDAQ US BuyBack Achievers Index, companies reduce their shares outstanding counts by 5 percent over the trailing 12 months before the index's annual reconstitution in January.

Allocations

As consumer discretionary and technology names have been among the most voracious buyers of their own shares since the start of the current bull market, it is not surprising that those sectors account for 37.5 percent of PKW's weight. In the fourth quarter, technology companies spent the most on buybacks while the biggest growth in share repurchases came by way of industrial and consumer discretionary names, according to FactSet. Industrials are PKW's second-largest sector allocation at 23.1 percent.

“When the dollar amount of buybacks increased, as shown by the purple line, the stock of companies that repurchased shares (as measured by the BuyBack Index) generally outperformed the S&P 500 Index. Conversely, when the dollar amount of buybacks decreased, the stock of companies that bought back shares generally underperformed the broader market,” added PowerShares.

Holdings

Dow components McDonald's Corporation (NYSE: MCD) and Boeing Co (NYSE: BA) are PKW's two largest holdings, combining for almost 10 percent of the ETF's weight. Although Apple Inc. (NASDAQ: AAPL) has been one of the largest share repurchasers in dollar terms, the company did not reduce its shares outstanding count by 5 percent last year, so it is no longer a member of PKW's lineup.