This year, dividend distribution and buybacks have been the high points in the corporate space. The trend is evident from Goldman Sachs’ comment that the “S&P 500 companies are buying back more than 3% of market cap, 2x the pace from the 1990s, and dividends are up 50% since 2010”. The research agency also sees 80% of the S&P 500 companies undergoing share repurchase programs.
As per CNBC, since companies can access cheap financing due to the Fed’s vow to keep ultra-low interest rates in the U.S. economy for certain period, they can easily fund buybacks well into the future (read: Forget Dividend ETFs, Focus On Buybacks Instead).
Yahoo! Buyback in Focus
Most recently, the Internet portal behemoth Yahoo Inc. (YHOO), in accord with other S&P 500 partners, raised its stock-buyback plan by $5 billion. Since January 2012, Yahoo has spent $5.3 billion in buybacks, including $1.7 billion in the third quarter.
Prior to the recent authorization, Yahoo approved a buyback of $5 billion worth of shares in May 2012, under which nearly $324 million was available as of September 30, 2013.
A share buyback program helps a company to reduce its outstanding share count, thereby increasing earnings per share and return on equity. Apart from bolstering shareholder value, this strategic move will also lift the relatively undervalued share price.
Market and ETF Impact
Following the announcement, Yahoo share prices increased 2.86% in a single trading session on November 20th on volume of around 32,000,000 shares, which was far higher than the average trading volume of around 19,000,000 shares a day (see 3 Internet ETFs Leading the Tech World Higher).
Yahoo has decent exposure in funds like First Trust Dow Jones Internet Index (FDN) PowerShares NASDAQ Internet Portfolio (PNQI) and PowerShares Dynamic Media (PBS).
Though the funds slipped in the trading session in contrast to one of their component’s outperformance, investors might consider buying the products on the recent dip. The trio has a top Zacks ETF Rank of ‘1 or 2’ and could be interesting picks for investors.
First Trust Dow Jones Internet Index (FDN)
This is one of the most popular ETFs in the technology equities space with AUM of nearly $1.7 billion and average daily volume of 250,000 shares. The fund tracks the Dow Jones Internet Index, a cap weighted benchmark of U.S.-based Internet companies, holding 41 stocks in its portfolio.
The ETF has a concentrated approach with more than 50% of assets in its top 10 holdings, thereby calling for modest company-specific risk. Yahoo is the sixth largest component of FDN with 4.89% allocation.
In term of sectors, Information Technology takes the top spot at about 70% of share in the basket followed by Consumer Discretionary with one-fourth of the total. The product has a certain tilt toward large caps with about 60% of assets, followed by mid (24%) and small (6%) caps. The ETF charges 57 bps a year in fees.
Despite some good news out of Yahoo, the fund lost 0.5% in YHOO’s key session, while it is up nearly 21% in the year-to-date time frame (as of November 20, 2013). FDN has a Zacks ETF Rank of 1 or ‘Strong Buy’ with ‘Medium’ risk outlook (read: Top Ranked Internet ETF in Focus: FDN).
PowerShares NASDAQ Internet Portfolio (PNQI)
This ETF tracks the Nasdaq Internet Index with about 81 securities in the Internet segment of the economy. The product is moderately popular with investors as it has about $232.8 million in assets, though volume is rather light at around 40,000 shares a day.
Here also, Yahoo takes up the sixth position with 4.68% of assets. Top holdings include the surging Amazon.com (AMZN), priceline.com (PCLN), and Google (G). The top 10 holdings account for a hefty share with nearly 60% of the fund.
Information Technology makes up about 65% of the portfolio, while Consumer Discretionary constitutes about 30% of the fund. Large caps rule the fund with roughly half the assets.
The fund dropped 0.67% in YHOO’s important trading session but surged a handsome 30% in the year-to-date time frame. PNQI has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with ‘High’ risk outlook.
PowerShares Dynamic Media (PBS)
This fund provides exposure to 30 U.S. media firms by tracking the Dynamic Media Intellidex Index. The product has amassed $274.1 million in its asset base and charges 63 bps in annual fees. While the ETF is inclined to consumer discretionary stocks with three-fifth exposure, Information Technology accounts for a sizable 35% of the product.
The top three holdings include the in-focus Yahoo, accounting for 5.82% of the total, Google and CBS Corp. Top 10 holdings take up more than 40% of assets thus having moderate company-specific risk.
The fund shed 0.49% in the day of Yahoo’s release but gained 19% in the year-to-date time frame. PBS has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Medium’ risk outlook (see all the Top Ranked ETFs here).
While most of the above-mentioned ETFs failed to ride out the positive market response for Yahoo’s buyback plan, we still remain optimistic on these for the coming days. The funds might have reflected the soft mood of Wall Street after the Fed minutes on November 20. Otherwise the sector is shaping up well and any of the three could be a solid pick.
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