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Gaining Insight With A Buyback ETF

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Gaining Insight With A Buyback ETF
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Share buybacks, along with dividends, are considered shareholder rewards, but there is additional insight to be gained from companies' repurchase efforts. Several exchange-traded funds, in some form or fashion, focus on companies that are prodigious repurchasers of their own shares, including the PowerShares BuyBack Achievers Portfolio (NYSE: PKW).

The PowerShares BuyBack Achievers Portfolio is the largest of the buyback ETFs and is nearly 11 years old. PKW holds 223 stocks and tracks the NASDAQ US BuyBack Achievers Index. That index “comprised of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months,” according to PowerShares

PKW is trailing the S&P 500 by 500 basis points, a trend that, if it holds, will mean the ETF will have lagged the S&P 500 in three of the past four years. However, PKW has previously outperformed broader U.S. equity benchmarks with ease.

An Effective Valuation Measure

As the current bull market in U.S. equities ages by the day, the chorus grows louder that the U.S. stocks are increasingly pricey. However, buybacks can be another, if under-utilized, valuation metric.

“Typically, management has a strong command of the prevailing competitive landscape, economic backdrop and industry trends affecting the firm,” said Invesco PowerShares in a recent note. “Because management has an information advantage, the decision to repurchase shares often implies that management sees the return potential from buying stock as advantageous to other uses of cash. In effect, management is telling investors that the stock is cheap. By extension, a buyback investment strategy assumes that management is reducing share count for good reason, which can prompt value investors to take action.”

There is something to be said for buybacks' impact on equity price performance. Since the ETF came to market, PKW has topped the S&P 500 by 170 basis points.

Explaining The Lag

As was noted earlier, PKW could lag the S&P 500 this year, making it three of four years that has happened. There are reasons for that trend.

“Buyback as an investment strategy lagged in 2014 and 2015,” said PowerShares. “I believe this was primarily because of market conditions. The NASDAQ US Buyback Achievers Index tilts toward the value and small-size factors because buyback is a form of value investing, while the companies meeting the buyback threshold of 5 percent tend to be less concentrated in size than a market-cap-based index like the S&P 500 Index.”

PKW allocates 24.5 percent of its weight to financial services stocks, its second-largest sector weight and a group widely considered a value play. There is something of a growth feel to the ETF as consumer discretionary and technology stocks combine for almost 37 percent of the ETF's weight.

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