ETFs That Focus on Share Buybacks
March 27th 2012 at 11:43am by John Spence
Some exchange traded funds zero in on companies that are buying back stock in an effort to beat the market.
Stock buybacks are a powerful force helping to push the market higher, according to some analysts.
“Flush with cash and in search of good investments in a world of 0% interest rates, more companies have been slapping buy ratings on their own stocks — which they view as undervalued — at a time when individual investors have been content to play it safe and park their cash in bonds and money market funds,” according to a recent USA Today report.
“Last year, companies in the Standard & Poor’s 500-stock index spent $404.2 billion to buy their own company’s stock, nearly double the amount back in 2009,” the newspaper said.
Buybacks could total $550 billion this year, according to the USA Today story. “It is, has been, and will continue to be the biggest driver of the stock market,” said Carmine Grigoli, chief investment strategist at Mizuho Securities.
TTFS manager AdvisorShares says stocks “should perform best when their outstanding shares decrease over the past 120 days,” according to a fact sheet on the ETF.
“All else being equal, if the same amount of money is chasing a smaller number of shares, then the share price increases. Corporate insiders have better information than the general public, which allows them to time their issuance and repurchases of stock,” it said.
“While academics might claim that investors should be indifferent between stocks that pay a dividend and those that buy back shares, fund providers know that investors like the allure of dividend funds. But there is good reason to pay attention to firms that reduce their shares outstanding,” said Morningstar analyst Michael Rawson in a report on buyback ETFs.
The analyst recommended PKW, which earned Morningstar’s highest rating “by seeking stocks that have bought back 5% or more of its shares outstanding in the previous year.” [ETF Spotlight: Buybacks and Share Repurchases]
Wall Street darling Apple (NasdaqGS: AAPL) earlier this month announced a $2.65-a-share dividend as well as a stock buyback plan. [Nasdaq-100 ETF Rises on Apple Dividend]
Separately, several U.S. banks recently announced dividend hikes and share repurchase plans after passing the Federal Reserve stress tests. [Bank ETFs Juiced by Dividends, Share Buybacks]
PKW is up 10.9% year to date, while the S&P 500 has advanced 13.2%, according to Morningstar.
PowerShares Buyback Achievers
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.