With interest rates so low, it's easy for investors to focus on dividends and there's nothing wrong with that, but they shouldn't overlook the importance of buybacks in the shareholder rewards equation.
Importantly, companies committed to buying back their own stock and meaningfully reducing shares outstanding counts are often considered quality companies. That's a favorable long-term trait and one that's highly pertinent in the current market environment. Add to that, buybacks are poised to reach epic heights this year.
“We are watching the $7tn in cash that U.S. corporates have accumulated heading into 2022. If companies deploy their cash (without any increase in leverage) in historically typical ways, dividends, buybacks, capex and acquisitions could rise $300bn this year (+16%) to a record $2.1tn,” according to Bank of America Global Research.
With those factors in mind, investors might want to consider the following buyback ETFs rather than stock-picking among equities with repurchase proclivities.
Invesco BuyBack Achievers ETF (PKW)
The Invesco BuyBack Achievers ETF (PKW) tracks the Nasdaq US BuyBack Achiever Index. Over the past two years, that index beat the S&P 500 by a staggering 1,300 basis points. As impressive as that is, there's more to the story.
In order for a company to be included in the Nasdaq US BuyBack Achiever Index, it must reduce its shares outstanding tally by at least 5% over the prior year. The benchmark and PKW are rebalanced quarterly in January, April, July and October. That mandate ensures PKW isn't chock full of companies that buying back stock only to send those shares back out the door through acquisitions and the like.
Just 153 companies currently meet that requirement and while some well-known companies in growth sectors, such as communication services and technology, are in the midst of massive repurchase programs, this buyback ETF allocates over half its weight to value stocks.
WisdomTree U.S. Value Fund (WTV)
The WisdomTree U.S. Value Fund (WTV) isn't a traditional buyback ETF. Rather, the fund is a play on shareholder yield, which encompasses buybacks, dividends and debt reduction. In other words, WTV has a lot of quality characteristics. It's also proving solid amid a weak start to 2022 by stocks.
“That isn’t surprising. The six major bear markets of the last half-century devastated companies that were heavy equity issuers, the kinds of stocks WTV's buyback screen tends to avoid. In crashes, the diluters plunged,” says Jeff Weniger, WisdomTree head of equity strategy. “While “nobody makes money in a bear market,” owners of the “buybackers” lived to see another day.”
Speaking of performance, WTV has some favorable long-term history on its side – confirmation that buybacks are an efficacious point of emphasis for investors.
WTV “has a net buyback yield of 5.6%, which is akin to a $10 billion market cap company buying back $560 million worth of stock in a year. That is four times as high as the S&P 500’s net buyback yield of 1.4%,” concludes Weniger. “WTV has annually beaten both the S&P 500 Value and the Russell 1000 Value Indexes by more than a percentage point since its inception a generation ago through March 7, 2022. It has zero exposure to share diluters.”
Invesco International BuyBack Achieverd ETF (IPKW)
As its name implies, the Invesco International BuyBack Achieverd ETF (IPKW) is the international counterpart to the aforementioned PKW. Likewise, IPKW's underlying index – the Nasdaq International BuyBack Achievers Index – the international equivalent of PKW's index and also features the 5% shares outstanding reduction requirement.
While IPKW doesn't get much attention, it should because it's long outperformed the MSCI EAFE Index. Over the past three years, this buyback ETF is up 32.8% compared to 18.6% for the international developed markets benchmark.
As for countries outside the U.S. rich in share repurchasers, IPKW allocates about 52% of its weight to Japanese, South Korean and Canadian stocks.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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