Exchange traded funds that emphasize buybacks and share count reduction as part of their methodologies are headed for another year of solid performances, though some of the group’s marquee ETFs appear poised to lag the S&P 500 for the first time in several years.
During the third quarter, S&P 500 members spent $143 billion on share buybacks, a year-over-year increase of 16%, according to FactSet data. Seventy-five percent of the benchmark U.S. index, or 374 members, repurchased some of their own shares during the July through September time frame, according to FactSet.
The PowerShares Buyback Achievers Portfolio (NYSEArca: PKW), TrimTabs Float Shrink ETF (NYSEArca: TTFS) and the Cambria Shareholder Yield ETF (NYSEArca: SYLD) all traded lower during the third quarter, each of those ETFs are heading toward year-to-date gains. PKW, the largest buyback ETF, is in position to lag the S&P 500 for just the second time over the past seven years. [How Slowing Buybacks Affect ETFs]
The $2.65 billion PKW maintains robust exposure to the sectors that are the largest share repurchasers. During the third quarter, the technology and consumer discretionary sectors, a combined 50.5% of PKW’s weight, spent the most on buybacks. At the end of October, those sectors combined for 46% of TTFS’ weight and 31% of SYLD’s weight.
The actively managed SYLD focuses on dividends, buybacks and debt reduction. TTFS, also an actively managed fund, focuses on net share count reduction and constituents’ ability to generate free cash. [Float Shrink ETF Matures]
“At the company level, Apple was the largest contributor to the increase in dollar-level share repurchases on a year-over-year basis. The company spent $17.0 billion in share repurchases during Q3 2014, which was the highest amount spent by any company in the index and reflected a 240% increase over the year-ago quarter ($5 billion). It is important to note that $9 billion of the $17 billion dollar total was a payment for a new accelerated share repurchase arrangement (“ASR”) initiated in August. This marked the second-highest dollar amount spent on buybacks during a quarter by an individual company since 2005 (when FactSet started tracking the data), trailing only Apple’s $18.6 billion dollar purchase during Q1 2014. On a trailing 12-month basis (TTM), Apple has now spent the highest amount on buybacks of all the companies in the index. Apple’s total spending over this time frame ($55.9 billion) is nearly three times higher than IBM’s total spending ($19.3 billion), which is the second-highest amount in the index,” said FactSet.
Interestingly, none of the ETF’s mentioned here are heavy on the third-quarter’s largest share repurchasers. Apple (NasdaqGS: AAPL) and IBM (NYSE: IBM) are not members of PKW’s lineup while SYLD and TTFS are both equal-weight ETFs, meaning no stocks account for significant percentages of those funds’ lineups.
Of the 10 largest share repurchasers during the third quarter, just two – Home Depot (NYSE: HD) and CBS (NYSE: CBS) – reside in PKW.
Over the trailing 12 months, Apple and IBM have reduced their shares outstanding counts by 6.8% and 8.9%, respectively. If those percentages remain or increase through year-end, those two stocks would qualify for entry to the NASDAQ US BuyBack Achievers Index. [Apple Advances Toward Buyback ETF]
That index is PKW’s benchmark and “is 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.
PowerShares Buyback Achievers Portfolio
Tom Lydon’s clients own shares of Apple and TTFS.