Market Overview

ETFs for Japan's Buyback Bonanza

ETFs for Japan's Buyback Bonanza

U.S. companies love to repurchase their own shares. S&P 500 members buying back nearly $98 billion of their shares in the first quarter proves as much and investors benefit.

While investors may not always pick the stock that benefits the most from a share repurchase plan, they do not have to when they can simply use the PowerShares Buyback Achievers ETF (NYSE: PKW), a fund that has outperformed the S&P 500 by over 2,500 basis points over the past three years.

PKW is not the only ETF that offers investors exposure to buyback stories. Some familiar Japan ETFs could be sound options for playing companies' new found penchant for share buybacks in the world's third-largest economy. Companies that trade on the Topix, a broad Japanese benchmark, repuchased $17.8 billion of their own shares in the first half of this year, Bloomberg reported.

The closest thing U.S. investors have to a Topix tracking ETF is the iShares Japan Large-Cap ETF (NYSE: ITF). ITF, previously highlighted as a stealth Japan play, has surged 10% in the past month.

This year's level of Japanese share repurchases is the best since 2005, a year in which the iShares MSCI Japan ETF (NYSE: EWJ) surged nearly 28 percent. Note the WisdomTree Japan Hedged Equity Fund (NYSE: DXJ), the top-performing U.S.-listed Japan ETF this year, did not debut until June 2006.

While Japanese share repurchases still pale in comparison to what is seen in the U.S., it must be remembered that practice was not even allowed in Japan until 1994. In 2000, Japanese companies repurchased just $9 billion worth of their own stock, according to a Keio University study.

However, Japanese companies have previously shown an ability for getting good value when repurchasing their own shares. Keep in mind U.S. companies are boosting buybacks as the S&P 500 reaches a string of record of highs. However, Japanese companies increased buybacks by 33 percent in 2008 from 2007, according to the Financial Times.

Obviously, 2009 was not a great year for stocks because the financial crisis was drawing to a close, but Japanese buybacks did bear fruit. From the second quarter through the middle of the fourth quarter 2009, EWJ and DXJ each surged nearly 50 percent.

Important to ETF investors looking to profit from future Japanese share repurchases is the fact that companies there appear committed to ongoing buybacks. Share repurchases in Japan may double to 3.8 trillion yen in year ending March 2014, funded by higher earnings and cash balances, Bloomberg reported, citing Goldman Sachs.

Critics allege that Japanese companies are merely embracing buybacks as means of anticipating inflation that will erode the purchasing power of their free cash streams. That is akin to saying U.S. companies have boosted dividends and buybacks because of piddly interest rates. It might be true. It probably is, but investors need not be concerned with the "why." Not when DXJ surged almost 28 percent over the past six months. EWJ and ITF are up an average of 20 percent over that time, indicating Japan ETFs have already gotten a jolt from buybacks.

In terms of sectors that have been home to robust buybacks in Japan, Financial services, industrials and technology were among the leaders in 2009. Industrials, technology and staples have been noticeable share repurchases this year and those groups combine for about 49 percent of DXJ's weight. Those sectors combine for 48 percent of ITF's weight.

As for small-caps, consumer discretionary and technology constituents of the Russell 2000 have been voracious buyers of their own shares. Should Japanese small-caps follow suit, the WisdomTree Japan Hedged SmallCap Equity Fund (NYSE: DXJS), a credible weak yen play in its own right, should benefit.

The newly minted DXJS allocates about 35 percent of its weight to discretionary and technology names. And if Japanese small-cap industrials and financials that do the leading when it comes to buybacks of smaller stocks, DXJS has investors covered with a combined 37.6 percent weight to those sectors.

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Posted-In: Long Ideas News Short Ideas Specialty ETFs New ETFs Small Cap Analysis Currency ETFs Buybacks Best of Benzinga


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