Competition is brewing in the corner of the exchange traded funds universe occupied by buyback funds and those emphasizing share count reduction. State Street’s (NYSE: STT) State Street Global Advisors (SSgA), the third-largest U.S. ETF issuer, is entering the buyback ETF fray with the SPDR S&P 500 Buyback ETF (NYSEArca: SPYB).
The new ETF tracks the S&P 500 Buyback Index, which “provides exposure to the 100 constituent companies in the S&P 500 with the highest buyback ratio in the last 12 months. The buyback ratio is defined as the ratio of the total cash put towards buybacks in the trailing year and the market capitalization of the company as of a reference date,” according to a statement issued by SSgA.
The index is equally-weighted and rebalanced quarterly.
Passively managed, SPYB will likely draw comparisons to the popular PowerShares Buyback Achievers Portfolio (NYSEArca: PKW). That ETF benchmarks to the NASDAQ US BuyBack Achievers Index which “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. [Apple Finally Enters Buyback ETF]
There are key differences between those indexes and ETFs. Notably, PKW is not an equal-weight fund and charges 0.68% per year. SPYB is an equal-weight ETF with an annual expense ratio of 0.35%. One similarity between the two buyback ETFs are their large weights to the consumer discretionary and technology sectors. Those sectors combine for 44% of SPYB and 51.5% of PKW.
“Over the past three decades, share repurchases have surpassed cash dividends to become the dominant form of corporate payout in the United States. From 1980 to 2013, the proportion of dividend-paying companies hasdecreased from 78 percent to 40 percent.1 During this same period of time, the proportion of companies with share buybacks increased from 28 percent to 43 percent.1 This increased use of share buybacks is driven by legal, tax, and structural changes in the US markets,” according to SSgA.
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. [Another Solid Year for Buyback ETFs]
SPYB Index Top 10 Holdings
Table Courtesy: SSgA
ETF Trends editorial team contributed to this article.