This New ETF Looks To Take Advantage Of The Stock Buyback Trend
Summary State Street launched the SPDR S&P 500 Buyback ETF with the intention of capitalizing on the recent share buyback popularity. Its closest comparable, the PowerShares Buyback Achievers ETF, has doubled the return of the S&P 500 since its inception in 2006. Roughly 80% of S&P 500 companies have bought back their own shares within the last couple years. Companies, it seems, have had an insatiable appetite for buying back their own shares lately. It’s a strategy that is a bit of a double-edged sword. It’s great for shareholders as a reduced share count boosts earnings per share and almost always pops the share price. It also works out better for taxes because it’s essentially a tax-free transaction (as opposed to dividends which would be taxable). On the other hand, it could be an indication that the company doesn’t necessarily have any higher returning projects to invest in and instead are choosing to return the excess capital to shareholders. Big names like Boeing (NYSE: BA ), Microsoft (NASDAQ: MSFT ) and Apple (NASDAQ: AAPL ) have been big purchasers of their own stock lately and it’s estimated that 80% or more of S&P 500 companies have bought back their own shares recently. Given the effects that it has on stock prices, it’s not surprising that an ETF is attempting to jump on the trend in an attempt to deliver oversized returns. Earlier this month, State Street launched the SPDR S&P 500 Buyback ETF (NYSEARCA: SPYB ). The goal of the ETF is simple. It looks to invest in the top 100 stocks with the highest buyback ratios in the S&P 500 over the last 12 months. Current top holdings include big names like Southwest Airlines (NYSE: LUV ), Yahoo (NASDAQ: YHOO ) and Dollar Tree (NASDAQ: DLTR ). The fund’s 0.35% annual expense ratio is not unreasonable as it falls in line with the expense ratios of many of State Street’s SPDR ETFs, but is a little on the high side considering the fact that it is passively benchmarked to the S&P 500 Buyback Index. While the concept of this ETF will be of interest to many investors, I can’t help thinking that this type of ETF has been done and with much success already. The PowerShares Buyback Achievers ETF (NYSEARCA: PKW ) was launched back at the end of 2006, and since then has returned a total of 92% compared to the S&P 500’s return of 44%. In just the past five years, the Buyback Achievers ETF has returned 142% compared to the S&P 500’s 93%. Perhaps the key differentiator between the two ETFs is the expense ratio. The SPDR S&P 500 Buyback ETF charges roughly half of the 0.71% expense ratio that the PowerShares ETF charges. Management styles are slightly different – the SPDR ETF is equally weighted whereas the PowerShares ETF is not – but the concept is substantially the same. Liquidity is also a big factor currently. The PowerShares ETF manages roughly $2.7B and trades around 380K shares a day. The SPDR ETF is obviously brand new and has just $5M under management with very thin trading volume. Conclusion Given the popularity of stock buybacks in the last 1-2 years, it’s not surprising to see State Street begin offering a product designed to capture the performance boost that typically comes with them. PowerShares has already proven that this strategy can produce above average returns over a lengthy period of time. While State Street has demonstrated a great deal of success over time with its SPDR family of ETFs, I feel that investors looking to jump on the buyback bandwagon might be better served starting with the PowerShares Buyback ETF first. First, what’s the harm in going with the product with the proven track record. Second, give the SPDR Buyback ETF time to build an asset and trading base so it can shake out some of its operating inefficiencies first. Overall, I think the SPDR S&P 500 Buyback ETF will ultimately be a solid addition to the State Street lineup and warrants investor consideration. Disclosure: The author is long AAPL. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.