Buyback ETFs Look To Turn It Up A Notch In The Fourth Quarter

Entering Thursday, PowerShare BuyBack Achievers Fund (ETF) PKW, the largest buyback exchange-traded fund, sported a year-to-date loss of 8.2 percent, or nearly 300 basis points worse than that of the S&P 500.

Unless PKW stages an epic reversal in the last three months of 2015, it risks lagging the S&P 500 for just the third time in the past seven years. What is arguably more notable than the fact that PKW beat the S&P 500 four times from 2009 to 2014? The margins.

As in, when PKW beats the S&P 500, the former does so soundly. When the S&P 500 beats the buyback on an annual basis, it is more of a nudging or an eking out of a victory. Sort of like a football team winning a game by less than a touchdown.

Fourth Quarter Setup

The fourth quarter its prime time for PKW and other buyback ETFs, including the SPDR S&P 500 Buyback ETF SPYB, to get their respective acts together because November and December often bring ramped up repurchase activity.

Related Link: Seasonality Says These Sector ETFs Could Work In October

For the purposes of this article, the focus is on PKW because the ETF is nearly nine years old, providing plenty of past fourth-quarter performances to examine.

SPYB, a fine ETF in its own right, debuted in February.

“In terms of stock buybacks, corporations are now in their blackout period before earnings. However, that did not stop the whole Street from cherry picking their interpretation of this chart that was widely distributed overnight. The message being circulated is that buybacks usually surge in Q4 and that reinforces the positive seasonality usually seen from October onward,” said Rareview Macro founder Neil Azous in a note out Thursday.

Citing Goldman Sachs data, Azous pointed out that November brings the briskest buyback activity, while December is tied with May as the third-busiest month for share repurchases.

If that seasonality holds true this year, that could be some welcomed relief following the second quarter's drop-off in buyback activity.

In the second quarter, share repurchases by S&P 500 member firms slid 8.7 percent to $131.6 billion, down from the $144.9 billion posted in Q1 2015, according to S&P Dow Jones Indices.

PKW's Past Q4 Performances

As for PKW's fourth-quarter tendencies, not surprisingly, those depend on what the broader market is doing.

For example, the S&P 500 climbed 6.3 percent in the fourth quarter of 2014, but PKW was nearly 50 percent better. PKW also posted a better than 9 percent gain in the same period of 2013.

The fourth quarter was not much to brag about for either PKW or the S&P 500, but 2011 was something to behold. In that year, the S&P 500 gained 14.9 percent, but PKW climbed 16.3 percent while being 520 basis points less volatile than the benchmark U.S. index.

As Azous noted, buybacks are usually slow in the first month of each quarter, so if PKW is to become a story again, it might be more of a November than October story. The four slowest months of the year for repurchase activity are all months that start quarters – January, April, July and October, according to Goldman data.