A Selective Approach to Buyback ETFs

Even with stocks continuing to flirt with record highs, Corporate America still loves buybacks and those share repurchases reached a fevered pitch in February.

CEOs announced a record $104.3 billion in share buybacks last month and companies repurchased an average of $5 billion of their shares per day, accounting for about 2% of the value of shares traded in the U.S., report Lu Wang and Oliver Renick for Bloomberg.

That comes after buybacks in 2014 came close to topping the annual record of $589 billion set in 2007. Last year, S&P 500 buybacks and dividends combined for $900 billion, topping the previous record of $846 billion set in 2007. [Buyback, Dividend ETFs for Value Investors]

With companies repurchasing their shares at high levels and arguably stretched valuations, at least in some sectors, it pays for investors to be selective with buyback. The actively managed TrimTabs Float Shrink ETF (NYSEArca: TTFS), which as its name implies, emphasizes actual reductions in shares outstanding tallies rather than just buybacks.

California-based TrimTabs Asset Management, TTFS’ manager, does not focus purely on buybacks because it is one thing for a company to make a buyback announcement, but it is another thing altogether for that company to resist the temptation of increasing its float with executive stock options, which can mitigate the float shrink impact of the announced repurchase program. [Behind the Scenes With the Float Shrink ETF]

Another important element to the buyback ETF equation is sector weights. Like its rivals, TTFS is heavy on technology and consumer discretionary (those sectors combined for 42% of the ETF’s weight at the end of January), but again TTFS differs from its peers with its focus on float shrinkage, not just announced buybacks.

“We definitely like consumer discretionary right now.  This sector features some of the biggest and best companies on the market with a favorable policy towards float shrink.  It’s the sector that benefits from low oil prices, and it’s among the best performing sector this year.  Year-to-date newly announced buyback programs from Consumer Discretionary companies have added $42.5 billion buyback capacity, or a third of the market total,” said TTFS Portfolio Manager Minyi Chen in an email exchange with ETF Trends. [Float Shrink ETF Matures]

Chen highlighted high-flying Dow component Home Depot (NYSE: HD) as one of the companies that speaks to the veracity of discretionary sector share count reduction.

“We have Home Depot which just announced an $18 billion buyback through 2017, and the fiscal 2015 guidance suggested $4.5 billion buyback this year.  At its current valuation of $150 billion, that means we shall expect a 3% float shrink this year and a 12% shrink in three years,” said Chen.

Chen also likes the technology sector’s float shrink capabilities, but the portfolio manager is selective here as well. For example, TTFS held Apple (NasdaqGS: AAPL) before a rival ETF did. Additionally, International Business Machines (NYSE: IBM), which is funding buybacks with large amounts of corporate debt, is not a member of TTFS’ portfolio. [Apple Enters Buyback ETF]

Tech “has added $24.3 billion in new buyback capacity YTD, the second highest among all sectors.  We have many mega-cap companies from this sector now actively engaged in float shrink as those IT companies evolved from high-growth companies into slower-growth but more mature companies now paying dividends and buying back shares,” according to Chen.