The U.S. markets took a massive hit in the fourth quarter but that has not affected insider buying. The number of corporate executives and officers buying shares of their own companies has doubled in the past two months from the prior two. As a result, insider buyers have surpassed sellers by the maximum margin
since August 2011 , per data compiled by The Washington Service.
Inside Insider Buying
The buying of a company's shares by its own employees is called insider buying. Strong insider buying shows that the company's officials are optimistic about the stock. It could be because of the fact that company's officials are about to launch some new products and anticipate the stock will soar ahead or because they find the stock trading at a cheaper valuation. Whatever the case, solid insider buying means the stock is approaching a high-flying zone.
What Led to the Buying Spree?
This year, the S&P 500 has lost about 7.7% (as of Dec 27, 2018) on host of issues, including the Fed's policy tightening, renewed global growth worries, an oil price slump, widespread tech selloffs, heightened trade tensions between the United States and China, fears of peaking U.S. economic growth, and finally the government shutdown (read:
5 ETFs Up At Least 10% in Tumultuous Q4 ).
This has corrected equity valuation to a large extent. At 13.6 times forecast earnings, the index is now trading at 9% discount to the average multiple since the bull market started in 2009 and insider buyers thus have started taking advantage of the prevailing low prices. After all, profits from S&P 500 companies are expected to rise to a record $173 a share next year.
In August 2011, the S&P 500 was in the middle of a 19% decline before staging a 10% rally in each of the next two quarters, per Bloomberg. Again, this time around, huge insider buyers' interest call for a probable equity rally in early 2019.
So, if you want to cash in on the bullish signals sent by corporate insiders, you can very well play these below-mentioned ETFs.
Invesco Insider Sentiment ETF NFO
The 100-stock fund looks to track the Nasdaq US Insider Sentiment Index and offers exposure to companies with strong corporate insider buying. The fund also focuses on companies with compelling share prices. No stock accounts for more than 1.29% of the fund, resulting in low company-specific risks. For this relatively unique exposure, the fund charges 60 bps in fees. Industrials, Information Technology, Utilities and Real Estate hold double-digit allocation in the fund (see
all Total Market (U.S.) ETFs here).
Direxion All Cap Insider Sentiment ETF KNOW
The fund looks to follow the Sabrient Multi-Cap Insider/Analyst Quant-weighted Index. It is heavy on the consumer discretionary sector (31.23%) followed by financials (20.67%). The index puts more focus on Wallgreens (2.59%), Target (2.49%) and Signet Jewelers (2.44%). The fund charges 59 bps in fees.
Invesco Buyback Achievers Portfolio PKW
A plethora of buybacks took place this year due to tax reform. Corporate America underwent the first full year under the new tax law by offering a
record-setting $1 trillion of stock buybacks. The prior high was $781 billion in 2015 (read: Buyback Remains Strong: How to Tap with ETFs? ).
It was believed that U.S. companies are hoarding $2.6 trillion in cash overseas equivalent to almost 14% of the total U.S. gross domestic product. So, under the repatriation tax holiday, U.S.-based companies were comfortable in repatriating income earned in a foreign country and investing that in their own shares.
PKW tracks the NASDAQ US Buyback Achievers Index, which comprises companies that have repurchased 5% or more of their common stock in the trailing 12 months. The 127-stock fund charges 63 bps in fees. It puts over 26% of its portfolio in the Financials, followed by 19.58% in Consumer Discretionary, 13.85% in Consumer Staples and 11.41% in Health Care.
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