Opportunity With Buyback ETFs

ETF Trends

The numbers are in and S&P Dow Jones Indices is estimating S&P 500 members spent $129.4 billion on share buybacks during the fourth quarter of 2013, up from $128.2 billion in third quarter. For all of last year, S&P 500 constituent companies spent $475.6 billion on buybacks, up from $398.9 billion in 2012.

While that is a mammoth and one, as has previously been documented, that could purchase every U.S. sports franchise, it is not a record for U.S. share repurchases. In fact, $475.6 billion is a good bit away from the record of $589.1 billion spent on share buybacks in 2007. [Buyback ETF Beats Its Top Holdings]

Records or not, investors love ETFs that emphasize the theme of reduced share counts. For example, the PowerShares Buyback Achievers Portfolio (PKW) is third-best PowerShares ETF over the past year in terms of assets gathered at over $2.2 billion while the actively managed TrimTabs Float Shrink ETF (TTFS) recently topped $100 million in assets. [Float Shrink ETF Tops $100M in Assets]

“The average stock price for Q1 2014 is running 21.0% higher than Q1 2013, meaning that a 21% increase in current expenditures is necessary to purchase the same number of shares as last year,” said S&P Dow Jones Senior Index Analyst Howard Silverblatt in a research note.

S&P Dow Jones Indices points out that in the fourth quarter, technology again accounted for the bulk of U.S. buyback activity at 26.7%, up from 25.3% in the third quarter. Dow component IBM (IBM) and Apple (AAPL) combined for $10.8 billion of fourth-quarter buybacks.

While technology is PKW’s second-largest sector weight at 16.7%, neither Apple nor IBM currently reside in the ETF, but Apple’s addition to PKW could come as soon as the April rebalance. [Apple Advances Toward Buyback ETF]

TTFS is an equal weight ETF, so no single stock looms particularly large in that ETF, but IBM and Apple combine for 2.05% of the fund’s weight. The Cambria Shareholder Yield ETF (SYLD) , which focuses on dividends, buybacks and debt reduction, had a 12% weight to tech at the end of last year. SYLD is also an equal weight ETF with no IBM exposure an almost 1% weight to Apple, according to Cambria data.

In order, Apple, Exxon Mobil (XOM), IBM, AT&T (NYSE: T) and Pfizer (PFE) were the largest share repurchasers last year, according to S&P Dow Jones Indices. Only AT&T and Pfizer appear in PKW because the others did not repurchase at least 5% of shares outstanding over the trailing 12 months, the qualifier for admission to the ETF. Those two stocks combine nearly 10% of PKW’s weight.

Of the 20 largest share repurchasers in 2013, just three – AT&T, Pfizer and Oracle (ORCL) – reside in PKW. SYLD holds six. TTFS holds five.

Top 20 Q4 2013 Share Repurchases

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Chart Courtesy: S&P Dow Jones Indices

Tom Lydon’s clients own shares of Apple, Pfizer and TTFS.

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