ETFs That Bet on Buyback

05/08/2015 9:00 am EST

Focus: ETFs

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Mark Salzinger, fund expert and editor of The Investor's ETF Report, looks at a pair of specialized funds that invest in companies undergoing share buyback programs.

PowerShares BuybackAchievers (PKW) invests in US stocks that have repurchased at least 5% of their shares outstanding over the 12 months prior to the index’s annual reconstitution.

Companies that repurchase significant numbers of their own shares tend to have several characteristics in common, including high profitability and substantial cash holdings.

PKW’s return on invested capital (a measure of profitability relative to both debt and equity) was recently 16.4%, vs. 14.7% for the index.

PKW’s turnover rate of 92% suggests that its portfolio is almost completely different from year to year, which makes sense, because most companies can’t indefinitely repurchase shares at a 5% annual pace.

However, 20 of PKW’s holdings have been in the portfolio for at least three years. Their average annualized return over that time was recently 25.0%, vs. 16.2% for the S&P 500. PKW’s overall annualized return over the past three years (through February 2015) was recently 19.8%.

PKW has now been joined by PowerShares International Buyback Achievers (IPKW), which applies the same methodology to foreign stocks: investing in foreign developed and emerging market stocks that have repurchased at least 5% of their shares in the 12 months prior to its index’s annual reconstitution.

In its first full year since inception (through February 2015), IPKW has gained 5.7%, vs. 0.9% for the benchmark MSCI All-CountryWorld ex US Index.

Like its US-only sibling, IPKW tends not to have heavy exposure to sectors that have struggled the most in recent years: energy and materials.

Stocks from Japan account for nearly 32% of the portfolio, followed by Canada (14%), the UK (12%), the Netherlands (8%) and Australia (8%). Its top emerging markets recently were Mexico, South Africa, and Indonesia.

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