Controversy Aside, This Buyback ETF Is Soaring

Capitol Hill and Wall Street have a long history of butting heads. That notion was confirmed earlier this year when, in rarely seen bipartisanship, senators from both sides of the aisle levied criticism against stock buybacks.

Buyback criticism from Democratic senators differed from the critiques offered by some Republicans, but what was clear was that U.S. companies repurchasing massive amounts of their own shares has drawn the ire of some politicians.

Ensconced in controversy, buybacks continue and at prodigious paces. Fortunately for investors that embrace exchange traded funds (ETFs) dedicated to buybacks, those funds are thriving in 2019. The Invesco BuyBack Achievers (PKW), the oldest dedicated buyback ETF listed in the U.S., is doing something this year it frequently does: outperform the broader market.

As of Tuesday, April 16, PKW is up 20.50 percent year-to-date, an advantage of nearly 400 basis points over the S&P 500.

An Illustrious Track Record

PKW, which tracks the Nasdaq US BuyBack Achievers Index, turns 13 years old in December. The mandate of the Nasdaq US BuyBack Achievers Index is easy for investors of all experience levels to understand. That index is comprised of domestic stocks that have reduced their shares outstanding counts by at least 5 percent over the trailing 12 months. PKW's index rebalances in January, April, July and October.

So if ABC Corp. has 1 million shares outstanding in July and that number declines to 950,000 before PKW rebalances in October, that company would be eligible for inclusion in the fund.

From 2013 through 2018, PKW's annual performances were mostly mixed against the S&P 500. However, from PKW's inception in late 2006 through the end of 2018, the buyback fund beat the S&P 500 by 620 basis points while being less volatile than the U.S. equity benchmark. Other data points confirm the long-term efficacy of buybacks.

“Since its inception in January 1994, the S&P 500 Buyback Index (not PKW's index) returned 13.29% annually, compared with gains of 10.31% and 8.96% from the S&P 500 High Dividend Index and S&P 500, respectively,” said S&P Dow Jones Indices. “One of the key reasons for the outperformance is that buying shares back decreases the company’s shares outstanding, which helps improve earnings-per-share (EPS) and eventually propels stock prices higher.”

Buybacks Vs. Dividends

Dividends and buybacks are the two primary avenues of shareholder rewards and as such, these two methodologies are frequently pitted against each other, though many companies engage in both practices. Buyback supporters argue that share repurchases are more tax-efficient and boost earnings while dividend supporters contend that cash payouts boost long-term total returns and can be effective avenues for averaging down for long-term investors.

As the chart below indicates, S&P 500 dividend levels have steadily increased while buyback levels have been more volatile over time.

 

 

Courtesy: S&P Dow Jones Indices

“Two decades ago, fewer than half of S&P 500 companies purchased shares back. The participation rate stood at around 80% as of Dec. 31, 2018,” according to S&P Dow Jones.

In many cases, investors can have their cake and eat it too with buybacks and dividends. Consider the following. PKW allocates 27.24% of its weight to the technology sector, the fund's largest sector allocation. Familiar technology names residing in PKW include Cisco Systems Inc. (CSCO), Apple Inc. (AAPL) and Qualcomm Inc. (QCOM), among others.

As the chart below indicates, there is a decent amount of overlap between PKW and the First Trust Nasdaq Technology Dividend Index Fund (TDIV), which tracks the Nasdaq Technology Dividend Index. As its name implies, TDIV is dedicated to dividend-paying technology companies, but data confirm many of those firms are also voracious buyers of their own shares.

 

 

Courtesy: ETF Research Center

The intersection of buybacks and dividends makes sense. As companies that pay dividends buyback more shares, those shares are retired, meaning the companies' dividend expenses decline.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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