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The Big Payback: Why Buyback ETFs are Outperforming


As Corporate America begins to return large cash hoards back to investors, exchange traded funds that track companies with a history of share buybacks are becoming more popular.

“In 2013, S&P Capital IQ expects share buybacks to remain on the forefront by Consumer Discretionary companies as a favored vehicle to return some capital to their shareholders,” Tuna N. Amobi, S&P Capital IQ Equity Analyst, said in a research note. “Pivoting the Discretionary sector among ‘buyback achievers’ is a cohort of large media and entertainment companies with ample ‘dry powder,’ stronger balance sheets, and a palpable capital allocation bias toward share buybacks.”

Easy credit has helped many companies maintain strong balance sheets as firms aggressively rebalanced with historic-low interest rates. Furthermore, companies are flush with cash because of moderate spending needs, accelerating free cash flow and improving financial flexibility. [Buyback, Dividend ETFs Boosted as Companies Return Record Cash]

According to Moody’s, US non-financial firms had $1.45 trillion in cash as of the end of 2012, up 10% year-over-year, reports Neena Mishar for Zacks. US banks could also return more than $30 billion back to share holders over the next 12 months, based on announcements by 14 banks.

With this in mind, there are a couple ETFs that provide exposure to companies with share buybacks, including PowerShares Dynamic Buyback Achievers Portfolio (PKW) , Guggenheim Investments Insider Sentiment ETF (NFO) and TrimTabs Float Shrink ETF (TTFS) . However, S&P analysts give NFO and TTFS and underweight rating due to unfavorable risk and cost factors.

S&P analysts, though, provide a marketweight rating for PKW based on favorable performance based on fair value and technical indicators.

PKW has a five-year annualized return of 10.2%, nearly doubling the 5.3% return of the S&P 500, according to Morningstar. [Buyback ETF’s Five-Year Return Creaming the S&P 500]

PKW has a 18.6% allocation toward Media, Movies & Entertainment account for 10.3% and Cable & Satellite makes up 5.7%. Among its top ten holdings, large media names stand out, including News Corp, Time Warner, DirecTV and Viacom. The ETF also has a 35.3% weighting toward the consumer discretionary sector.

S&P analysts have found that media companies have been outperforming the broad S&P 1500 benchmark. Year-to-date through March 22, the Movies & Entertainment and Cable & Satellite sub-industries were up 16.6% and 8.2%, respectively, compared to the 9.4% rise in the broader markets.

For more information on the broad markets, visit our S&P 500 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.