In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
ETFs Eye Float Shrink and Buybacks
12/29/2015 9:00 am EST
US companies continue to buy back their own shares at an all time high rate, both in terms of absolute dollars and as a percentage of shares outstanding, observes Mark Salzinger, editor of The Investor's ETF Report.
PowerShares Buyback Achievers (PKW) invests in companies that have bought back a significant proportion of their shares over the past year.
AdvisorShares TrimTabs Float Shrink (TTFS) also has built a strong record with an even more rigorous set of standards for buybacks. Their focus is on so-called float (basically all the shares available for trading by the public).
TrimTabs believes that decreases in float should usually be supportive of higher stock prices.
The TTFS portfolio is limited to stocks that can finance their share repurchases from free cash flow, the cash remaining after making investments in the business.
Strong free cash flow generation is a decent proxy for overall profitability. TTFS eschews companies that borrow heavily.
TrimTabs scores all of the stocks in the broad Russell 3000 Index on three factors: float shrink, free cash flow, and leverage. Stocks are selected from the top 10% of the best aggregate scores on the three factors. TTFS can hold between 80 and 120 stocks (recently 100).
The portfolio is equal weighted, though rebalanced at TrimTabs’ discretion instead of on a regular schedule. As a result of this weighting scheme, the largest proportion of the ETF’s portfolio is in mid-cap stocks, at 42%. Small- and micro-caps make up another 11%.
Meanwhile, PKW has a less complex standard: it invests in companies that have repurchased at least 5% of their shares in the past 12 months.
PKW recently had only about one-third of its portfolio in small- and mid-cap stocks. The largest single sectors in TTFS were technology (nearly 29%), consumer discretionary (18%), healthcare (15%), and industrials (12%).
Over the past three years, TTFS has gained 19.1% on an annualized basis, vs. 18.0% for PKW. Its outperformance is at least partly thanks to its greater holdings of mid-caps, but its portfolio also has less leverage on average.
TTFS’ biggest drawbacks are its expense ratio—a hefty 0.99%—and tax efficiency, as maintaining an approximately equally weighted portfolio should result in a lot of profit taking, especially in a rising market.
Also, despite its $230-million or so in assets, the ETF has a limited trading volume. Therefore, if you want to buy it, we suggest doing so with a limit order to put a ceiling on how much you pay.
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