The Big Payback: Why Buyback ETFs Are Outperforming

Includes: NFO, PKW, TTFS
by: Tom Lydon

As Corporate America begins to return large cash hoards back to investors, exchange traded funds that track companies with a history of share buybacks are becoming more popular.

"In 2013, S&P Capital IQ expects share buybacks to remain on the forefront by Consumer Discretionary companies as a favored vehicle to return some capital to their shareholders," Tuna N. Amobi, S&P Capital IQ Equity Analyst, said in a research note. "Pivoting the Discretionary sector among 'buyback achievers' is a cohort of large media and entertainment companies with ample 'dry powder,' stronger balance sheets, and a palpable capital allocation bias toward share buybacks."

Easy credit has helped many companies maintain strong balance sheets as firms aggressively rebalanced with historic-low interest rates. Furthermore, companies are flush with cash because of moderate spending needs, accelerating free cash flow and improving financial flexibility.

According to Moody's, U.S. non-financial firms had $1.45 trillion in cash as of the end of 2012, up 10% year-over-year, reports Neena Mishar for Zacks. US banks could also return more than $30 billion back to share holders over the next 12 months, based on announcements by 14 banks.

With this in mind, there are a couple ETFs that provide exposure to companies with share buybacks, including PowerShares Dynamic Buyback Achievers Portfolio (NASDAQ:PKW), Guggenheim Investments Insider Sentiment ETF (NYSEARCA:NFO) and TrimTabs Float Shrink ETF (NYSEARCA:TTFS). However, S&P analysts give NFO and TTFS and underweight rating due to unfavorable risk and cost factors.

S&P analysts, though, provide a marketweight rating for PKW based on favorable performance based on fair value and technical indicators.

PKW has a five-year annualized return of 10.2%, nearly doubling the 5.3% return of the S&P 500, according to Morningstar.

PKW has a 18.6% allocation toward Media, Movies & Entertainment account for 10.3% and Cable & Satellite makes up 5.7%. Among its top ten holdings, large media names stand out, including News Corp, Time Warner, DirecTV and Viacom. The ETF also has a 35.3% weighting toward the consumer discretionary sector.

S&P analysts have found that media companies have been outperforming the broad S&P 1500 benchmark. Year-to-date through March 22, the Movies & Entertainment and Cable & Satellite sub-industries were up 16.6% and 8.2%, respectively, compared to the 9.4% rise in the broader markets.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates.