This Buyback ETF Has Its Pros And Cons

As has been widely reported, share buyback plans have come under fire by politicians from parties, but companies remain fond of the strategy as a way of returning capital to shareholders and the related exchange traded funds have been solid performers this year.

The Invesco BuyBack Achievers ETF PKW is up 14.64 percent year-to-date.

What To Know

The $1.43 billion PKW follows the NASDAQ US BuyBack Achievers Index, which requires its member firms to have reduced shares outstanding tallies by at least 5 percent over the trailing 12 months. That index is rebalanced four times a year in January, April, July and October.

PKW has been around for more than 12 years and since inception has outperformed the S&P 500 by 50 basis points. Even with its impressive track record, PKW is not without its flaws nor are buybacks always the perfect avenue for rewarding shareholders.

“Firms that repurchase their shares tend to be highly profitable, but there is little to suggest that past repurchasing activity is predictive of future performance after controlling for profitability,” said Morningstar in a recent note. “There are cheaper and more direct ways to get exposure to highly profitable stocks.”

Why It's Important

While PKW's long-term performance is solid, individual companies are notoriously bad at timing share repurchases. Companies often hoard cash during recessions, when share prices are likely depressed, then engaged in buybacks in the middle and latter stages of bull markets, as has been seen in the recent U.S. bull market.

Additionally, share buyback plans are not always signs of financially sound companies as some companies will issue debt to fund repurchase programs.

“Share repurchases do not paint a complete picture of a firm’s financial health or its attractiveness as an investment,” said Morningstar. “Repurchases can be financed by debt, rather than by the strength of the underlying business. Such a strategy isn’t always desirable. And repurchases can hurt returns if managers overpay for their shares.”

PKW's methodology can lead to some sector-level concentration risk as not all sectors will have large numbers of constituents reducing shares outstanding by 5 percent or more over a given 12-month period. Currently, just two sectors – technology and consumer discretionary – combine for almost 45 percent of PKW's weight.

What's Next

“PKW uses a short period to measure share repurchases, which may not be indicative of future repurchases,” said Morningstar. “And there is little indication that the screen it uses is predictive of future performance after controlling for profitability.”

Morningstar has a Neutral rating on PKW.

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