Innovation remains a dominant theme in the ever-expanding ETF industry and the current product lineup is stacked with compelling strategies for investors of all walks. With over 1,400 ETPs to pick from, investors can slice-and-dice the investable universe practically which ever way they want. Although Apple’s recent distribution announcement may have introduced many investors to the concept of stock repurchasing (or share buyback), this particular phenomenon is nothing new in the investing world. In fact, one particularly interesting ETF is the PowerShares Buyback Achievers Portfolio Fund (PKW); this one-of-a-kind offering seeks to track an index of companies that have recently bought back significant portions of the company stock.
Before diving into the methodology behind PKW, it’s crucial to understand just exactly what a stock repurchase is, and why such a strategy may be appealing to shareholders and potential investors alike.
What Is A Buyback?
Share repurchase, or stock buyback, is a program in which a company simply buys back its own shares from the open market, effectively reducing the number of outstanding shares. Such a program is often times seen as controversial because some investors prefer for excess capital to be paid out in dividends or reinvested in the company.
The main appeal behind stock repurchasing is pretty straightforward; if a company is buying back its own stock, management must believe that shares are undervalued, which can be interpreted as a signal to the market that shares are mispriced as they are likely discounted. In other words, a stock repurchase program can be seen as a sign of confidence, which may potentially bolster the stock price higher as more and more investors take notice. Furthermore, because the number of shares outstanding is effectively reduced, a buyback program can help improve financial valuation ratios; a fewer number of outstanding shares can bolster ROE and ROA metrics while also helping to lower the stock’s P/E ratio.
Under The Hood
Since launching in December of 2006, PKW has accumulated close to $123 million in assets under management. This ETF is linked to the Share BuyBack Achievers Index, which is comprised of U.S. companies that have repurchased at least 5% or more of outstanding shares during the trailing 12 month period [see PKW Fact Sheet]. As such, PKW features a unique basket of holdings that separate it from other offerings in the All Cap Equities ETFdb Category.
First and foremost, this ETF is very well-balanced from a portfolio composition perspective; PKW offers exposure to 250 stocks, with about one-third of total assets allocated to the top ten holdings. The sector breakdown is also noteworthy as it differs from traditional large cap-heavy ETFs, which tend to be biased towards energy and financials firms. PKW features major allocations to the media and specialty retail sectors; exposure is also fairly equally spread out among holdings from the oil & gas, IT services, and Health Care sectors [see PKW Realtime Rating].
PKW charges 0.60% in expense fees, which may turn away cost-conscious investors looking for core equity exposure. On the other hand, this is the only ETF available that lets investors tap into a share buyback-focused strategy. As such, while not appropriate for all investors, PKW can serve as a valuable tool, or satellite holding, for those who believe in the power of share buybacks.
Disclosure: No positions at time of writing.
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