Credit: Shutterstock photoBuybacks stormed back into the news last week, with Bank of America ( BAC ) and JP Morgan Chase ( JPM ) announcing they will return more capital to shareholders ahead of their annual stress tests.
That perhaps reassured buyback ETF investors, as doubts grow about whether the trend has legs.
In 2015, S&P 500 companies spent $572.2 billion on buybacks, up 3.4% from the previous year, according to new data by S&P Dow Jones Indices. Total shareholder return for those companies, including dividends and buybacks, in 2015 set a 12-month record, at $954.6 billion.
"The report of buybacks' death was greatly exaggerated," Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said in a press statement accompanying the data release.
For companies, buybacks -- like dividends -- are a way to keep investors happy. Reducing the number of outstanding shares in a company drives up stock prices. And it's easy to do at a time when corporate cash hoards are growing and borrowing costs are near record lows.
However, Silverblatt's research noted that S&P 500 buybacks actually ticked down 3% in Q4 over the previous quarter, to $145.9 billion. Some strategists argue that buybacks are no longer fueling share prices the way they did in the past.
That seems to be true, as seen through the prism of exchange traded funds tracking buyback firms.
SPDR S&P 500 Buyback ( SPYB ), which follows an index of the top 100 stocks with the highest buyback ratios in the S&P 500, tumbled 7.2% in the year ended March 22. By comparison, SPDR S&P 500 ( SPY ) slipped 0.7%.
However, buyback ETFs have outperformed the S&P 500 over the longer term.
PowerShares Buyback Achievers ( PKW ), the largest ETF in its segment, produced an annual average 13.4% gain over the past five years vs. 11.9% for SPY. SPYB does not have a three- or five-year history.
PKW holds $1.77 billion in assets and tracks an index of U.S. companies that repurchased at least 5% of their outstanding shares in the previous 12 months.
In theory, buyback ETFs give investors exposure to quality businesses. Companies buying back their own shares tend to have healthy bottom lines. The top three holdings out of 233 in the PKW portfolio are McDonald's (MCD), Boeing (BA) and Qualcomm (QCOM).
The ETF has been outgunned year-to-date, and over the past two and three years, by a smaller and newer actively managed peer.
AdvisorShares TrimTabs Float Shrink (TTFS) invests in buyback companies while adding free cash flow and leverage screens. That helps it filter out low-quality stocks.
"We try to find companies that don't finance buybacks with debt," said Ted Theodore, portfolio manager of TTFS.
With rates poised to rise, Theodore believes many companies using debt for share buybacks may not have the ability to keep doing that.
"Our companies do. They have good organic growth to them, not just financial engineering," he added, referring to criticism that buybacks can give share prices an artificial boost.
TTFS holds 100 equal-weighted stocks , including Apple (AAPL). The iPhone maker spent $37.1 billion on share repurchases in 2015, helping the technology sector dominate S&P 500 buybacks.
The ETF is up 3.3% year to date. It has averaged a 13.6% annual gain over the past three years vs. 11.8% for SPY.
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.
