There are plenty of exchange traded funds offering investors exposure to value stocks while a smaller number are dedicated to the theme of share buybacks.
The WisdomTree U.S. Value Fund (WTV) is an example of an ETF that marries both concepts. Formerly an ETF dedicated to shareholder yield, WTV retains some of those properties today by offering investors a line-up chock-full of dividend-payers, loyal buyers of their own shares, or, in some cases, both.
WTV’s shareholder yield lineage is relevant for other reasons, including the notion that buyback quality is an overlooked yet meaningful concept.
“Not all buybacks are created equal. In fact, our analysis of repurchases within the Russell 1000 Index indicates that most net repurchases were executed by companies categorized with the highest shareholder yield—in other words, by companies that are repurchasing shares at more attractive levels relative to their market capitalizations,” says WisdomTree analyst Kara Marciscano.
With that in mind, it’s accurate to say that WTV also presents investors with a credible avenue to the quality factor. That makes its inclusion of value all the more relevant because there are times when quality stocks are richly valued.
Indeed, shareholder rewards, whether they’re buybacks, dividends, or both, are among the hallmarks of quality. However, the key with either type of shareholder reward is ensuring that a company can sustain these efforts and isn’t causing undue duress to its balance sheet in the process.
“WTV ranks and selects companies based on a composite score of their shareholder yield and quality metrics,” adds Marciscano. “In this dual framework, shareholder yield identifies companies that are repurchasing stock at attractive levels relative to their market capitalization, while the quality component identifies companies with higher relative efficiency, profitability and cash flow.”
Again, WTV isn’t a dedicated buyback ETF, but it does a more than admirable job of capitalizing on that theme, as it captures 70% of the buybacks employed by the 800 largest U.S. firms over the past year. That’s impressive, but what’s even more notable is that WTV components are actually reducing shares outstanding tallies, not buying back stock simply to send it back out the door through acquisitions.
“The companies in WTV are also meaningfully reducing their share counts. On average, companies in WTV reduced their shares outstanding by 2.8% in the trailing 12 months while the remainder of the 800 large-cap U.S. stock universe increased share counts by 1.1% on average, which dilutes shareholder ownership,” concludes Marciscano.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.
