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Corporate Buybacks Near Record As Related ETFs Lag

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By Drew Voros

ETF.com Editor-in-Chief

While corporate share buybacks are approaching a record level this quarter, ETFs that focus on companies engaged in purchasing their own shares have been underperforming.

Buybacks should have a positive effect on stock prices, at least in theory. But that’s not happening.

Over the past year, the PowerShares Buyback Achievers ETF (PKW)―which tracks a market-cap-weighted basket of firms that repurchased at least 5% of their outstanding shares in the past year―lost more than 8.4%, compared with a 0.8% loss for the SPDR S&P 500 ETF (SPY).

The SPDR S&P 500 Buyback ETF (SPYB), which tracks an equal-weighted basket of 100 companies in the S&P 500 with the highest buyback ratio, fell by 9.2% in the period.

However, the recent performance could just be an anomaly. Since inception in December 2006, PKW has handily outperformed SPY, with a gain of 94.8% compared with 71.5%.

In addition, the S&P 500 Buyback Index—which underlies the recently launched SPYB—has outperformed the S&P 500 in 17 of 20 years through March 2014. In that 20-year period, the S&P Buyback Index returned 15.1% annually compared with 9.1% for the S&P 500 and 11.5% for the S&P 500 Equal Weight Index.

After trailing the market for the past year, PKW and SPB could be looked as undervalued in context of past performance, which of course is no guarantee of future results.

Muni Bond Funds Growing

Federal Reserve data show that while direct individual investor ownership of municipal bonds declined by more than $25 billion last year, indirect ownership through muni bond mutual funds and ETFs grew significantly, by more than $50 billion. Inflows into mutual funds and ETFs are continuing this year. As of March 9, muni bond mutual funds have attracted $10.7 billion in new assets (according to the Investment Company Institute), and muni bond ETFs have added almost $1.5 billion (according to FactSet data).

Launches

So far this year, 33 ETFs have launched, which is a big drop from the 53 funds that launched at this time in 2015. In addition, assets invested in U.S. ETFs are up less than 3% from last year despite the large number of fund launched in 2015, with $60 billion added into ETFs over the last 12 months. There is now a total of $2.13 trillion in ETF assets.

In 2015, there was a proliferation of currency-hedged ETFs as well as smart beta ETFs from new issuers like wealth management titans such as John Hancock and Goldman Sachs.

The past week saw one launch, the First Trust Dorsey Wright Dynamic Focus 5 ETF (FVC), which serves as a complement to the $3.4 billion First Trust Dorsey Wright Focus 5 ETF (FV). The new fund, with a 0.79% expense ratio, follows a similar methodology, but the FVC can allocate up to 95% of its portfolio to a cash index depending on the momentum of other potential components.

The index for both uses relative strength analysis to determine the five First Trust funds with the most momentum, and equal-weights the funds in the portfolio. The equal weights are reset every time one of those five ETFs are switched, which happens twice a month

Closures

Five funds from PowerShares saw their last day of trading on Friday, March 18. Those funds are:

  • PowerShares KBW Capital Markets (KBWC)
  • PowerShares Fundamental Emerging Markets Local Debt Portfolio (PFEM)
  • PowerShares China A-Share Portfolio (CHNA)
  • PowerShares KBW Insurance Portfolio (KBWI)
  • ProShares Managed Futures Strategy (FUTS)

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


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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