Why It Might Be Time To Look At Buyback ETFs Again

During the course of the current bull market, one increasingly prominent theme has been companies' willingness to spend and spend big on share repurchase programs. Reduce shares outstanding, increase earnings per share and everyone winners, namely management and investors, is how buyback thinking usually goes.

That thinking has been a boon for exchange traded funds such as the PowerShares BuyBack Achievers Portfolio PKW. Since March 10, 2009, the day after the post-financial crisis market bottom, PKW has returned nearly 280 percent compared to about 213 percent for the S&P 500. Interestingly, PKW has also been slightly less volatile than the SPDR S&P 500 ETF SPY over that period, according to ETF Replay data. 

Year-to-date, things have been much different as PKW entered Wednesday with a 4.5 percent loss, or 50 percent worse than the 2015 showing turned in by SPY. However, it could be time to give ETFs like PKW and its newer rival, the SPDR S&P 500 Buyback ETF SPYB, a closer look as buyback activity could be poised to surge following a period of lethargy.

“Yesterday’s break in the investment grade new issuance drought is significant. As sentiment in the capital markets is repaired it should also inspire stock buyback activity. After a record 13 days of no issuance, 10 IG Corporate issuers tapped the dollar market yesterday, printing 19 tranches, and totaling $13.61 billion,” said Rareview Macro founder Neil Azous in a note out today. 

Dow components Goldman Sachs Group Inc. GS and Home Depot Inc. HD were among the well-known companies tapping the investment-grade corporate bond market yesterday. PKW, which allocates nearly 30 percent of its weight to consumer discretionary stocks, features Home Depot as its largest holding at a weight of 5.6 percent.

SPYB, which debuted in February, does not allocated more than 1.4 percent to any of its 102 holdings. Neither ETF currently holds shares of Goldman Sachs, but both funds own shares of Deere & Co. DE, which also issued new investment-grade debt on Tuesday.

PKW tracks 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. 

SPYB follows the S&P 500 Buyback Index, an equal-weight benchmark that ““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.

It remains to be seen if increased investment-grade debt issuance will translate into a significant increase buyback activity and if that increased activity is rewarding for PKW and SPYB. As it pertains to PKW, the ETF could use the help to pull ahead of the S&P 500. The ETF has only lagged the benchmark U.S. index twice in the past six years.