Dividend ETFs have been pretty popular with all stripes of investors, but there is now reason to believe that their appeal may be waning. These securities have been broadly underperforming the market lately, and some believe that this trend could continue in the near term.
This is largely due to talk of the Fed tapering bond purchases, which has helped bond yields rise, and pushed appeal for dividend securities lower. After all, this talk helps bonds to look slightly better in comparison, while many investors are also likely just growing worried about the trend, and are cashing in some big gains (also see REIT ETFs Crushed: Time to Panic?).
While events have certainly been gloomy lately, investors should remember that dividends aren’t the only way that companies can reward shareholders. Another avenue is to increase stock buybacks, a process which can also benefit share prices.
This is generally because this signals to the market that current share prices are undervalued, and thus a great investment by management. The process also reduces the supply of shares on the market—which can boost prices—while it also boosts EPS as well (read How the Buyback ETF Continues to Beat SPY).
How to Play with ETFs
Fortunately, investors can tap into this strategy via ETFs with a couple of funds on the market. While these are generally underappreciated by most investors, the pair—TTFS and PKW—have seen solid, market beating performances as of late.
However, investors should note that the duo have a couple of key differences which set them apart. First, PKW focuses just on companies that have announced large buybacks within the last year, while TTFS takes a ‘float-shrink’ approach instead (read Generate Alpha with these Outperforming ETFs).
Additionally, PKW, thanks to its index following approach, is cheaper than its active counterpart, TTFS. Still, TTFS has slightly outperformed its counterpart, though its volume is quite lower than the PowerShares entrant.
For more on buybacks and the ETFs that track the space, watch our short video on the subject below:
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