U.S. companies had spent more than $155 billion on stock buybacks during the first quarter of 2014 – the second-largest period of buybacks on record. In contrast, S&P repurchases decreased to $116.2 billion in 2Q 2014 and have gone down even further in the third quarter.
This however has not deterred issuers from filing for new products targeting this space. State Street has recently filed for a product that would tap companies having a high buyback ratio.
SPDR S&P 500 Buyback ETF in Focus
As per the SEC filing, the proposed ETF looks to track the performance of the S&P 500 Buyback Index, which provides exposure to 100 companies in the S&P 500 with the highest buyback ratio in the last 12 months. The index follows an equal weighted strategy and is rebalanced quarterly. The equal weighted strategy ensures that the index’s assets are quite well diversified with the top 10 holdings having just 10.9% allocation.
Presently, Marriott, Celgene, and Yahoo take the top three spots in the index. Sector-wise, Technology takes the top spot with 23.3% allocation, followed by Consumer Discretionary and Industrials with 19.5% and 16.4% exposure each.
How does it fit in a portfolio?
Per Bloomberg and S&P Dow Jones Indices, S&P 500 companies have been reinvesting 95% of their profits into stock buybacks. Share repurchases are usually an indication that the management of the company thinks its shares are undervalued. It’s generally a positive signal about the health of the company.
Though most investors prefer dividends to buybacks as they allow investors to get the cash immediately, however, a buyback has its own advantages. Buybacks reduce the outstanding share count and thus increase earnings per share. Further, they are more tax efficient than a special dividend.
During the third quarter, buybacks have boosted earnings per share of the S&P 500 companies by 2.35% – the highest level in more than two years. Moreover, U.S. companies have returned $250 billion to shareholders through share buybacks during the first nine months of 2014.
There are a couple of ETFs that focus on this niche strategy. PowerShares Buyback Achievers Portfolio (PKW) is the most popular fund in the space managing an asset base of $2.7 billion and trading in good volumes of 370,000 shares a day.
PKW tracks the NASDAQ US Buyback Achievers Index, which comprises companies that have repurchased 5% or more of their common stock in the trailing 12 months. The fund holds a basket of 171 stocks and charges 171 basis points as fees. The fund has returned 11.3% in the year-to-date frame.
TrimTabs Float Shrink ETF (TTFS) is another fund in the space with an AUM size of $158.5 million but sees light trading volume. The actively managed fund, however, is based on Trim Tabs’ research on stock prices being a function of supply and demand rather than value.
TTFS has returned 13.9% this year but the cost of the fund is somewhat high at 0.99% a year.
Thus, the recently filed product, if launched, will face competition from the above two funds. However, if the fund charges less than the above two funds and manages to return at least on par with the veterans in the space, it might be successful in garnering assets.
PWRSH-BYBK ACHV (PKW): ETF Research Reports
TRIMTB-FLT SHRK (TTFS): ETF Research Reports
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