Hidden Advantages With Buyback ETFs

The PowerShares Buyback Achievers Portfolio (PKW) is a big name among ETFs focusing on companies with impressive track records of repurchasing their own stock.

However, there are other advantages with this ETF that are visible upon further examination.

Stock repurchases help drive up earnings per share and often bolster stock prices. However, critics argue that buybacks artificially support the market during a time of stretched valuations and weak corporate earnings. Others warn that too much money spent on repurchases could reduce U.S. economic growth by pushing off long-term investment spending, especially when companies are re-buying stocks during record highs, which make it an inefficient use of money that could be spent on research or development.

“A reduction in shares outstanding spreads profits over a smaller base, which tends to increase a company’s earnings per share — an important measure of profitability,” said PowerShares in a recent note. “Assuming a constant valuation multiple and no change in earnings, rising earnings per share can support equity prices, as stock prices tend to move in the direction of earnings and profits over time.”

Stock buybacks helped diminish the number of shares outstanding, which has made the remaining shares that much more valuable. However, a company stock can still dip and repurchased shares can be distributed through employee options as part of their compensation.

Related: The Buyback ETF Theme Could Gain Momentum