Amid Controversy, Buyback ETF Proves Sturdy

For fans of share repurchase programs and the companies that use that avenue as a way of rewarding shareholders, February has been an interesting.

In a rare display of bipartisanship on Capitol Hill, politicians from both sides of the aisle are voicing criticism aimed at share buybacks.

What Happened

Sen. Bernie Sanders (D-VT), a 2020 presidential candidate; and Sen. Chuck Schumer (D-NY), in a New York Times op-ed, called buybacks detrimental to the economy. Soon thereafter, Sen. Marco Rubio (R-FL) introduced legislation that would alter the favorable tax treatment afforded to share repurchase plans.

Even with controversy, some exchange traded funds focusing on companies that are voracious buyers of their own shares are thriving this month. The SPDR S&P 500 Buyback ETF SPYB finished with a monthly gain of about 5 percent.

Why It's Important

SPYB is among the quality-oriented ETFs that are performing well this month. Others included dividend funds and ETFs focusing explicitly on the quality factor.

SPYB, which turned four years old earlier this month, follows the S&P 500 Buyback Index, which contains the S&P 500 member firms with the highest trailing 12-month buyback ratios.

The ETF's underlying index “screens securities based on the cash value of the actual buyback, not the reduction in number of shares outstanding, in order to more fully capture the shareholder value created by increasing share repurchases,” screens securities based on the cash value of the actual buyback, not the reduction in number of shares outstanding, in order to more fully capture the shareholder value created by increasing share repurchases," according to State Street.

SPYB is also an equal-weight fund, a strategy that in part explains some of the fund's February upside.

“By definition, the return of an equal weighted index is exactly equal to the return on the average of its component stocks,” said S&P Dow Jones Indices. “Moreover, the excess returns (or drag) realized by rebalancing back to 'target' weights are frequently similar among factor strategies.  Given these similarities, when equal weight outperforms cap-weight, factor indices will also tend to outperform.”

What's Next

None of SPYB's 100 holdings exceed weights of 1.16 percent and the lack of single stock concentration risk is beneficial considering the fund is top heavy at the sector level. Just three sectors – financial services, technology and consumer discretionary – combine for over 59 percent of SPYB's weight.

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