One of the fastest growing trends within the ETF universe is the use of unique strategies that are designed to add alpha over traditional broad-based indices such as the S&P 500
(INDEXSP:.INX). We have seen countless “smart beta” indices introduced to the market that are designed to provide the sense of an active strategy within the constraints of a rules-based stock-picking system. In my experience, these new indices rarely provide a meaningful lift in performance and are often saddled with significantly higher fees. However, there are always diamonds in the rough that sparkle amidst this crowded landscape.
One distinctive strategy that is continuing to shine brightly this year is the PowerShares Buyback Achievers Portfolio
(NYSEARCA:PKW). This ETF is based on the NASDAQ US Buyback Achievers Index
(INDEXNASDAQ:DRB) which selects domestic stocks that have repurchased at least 5% or more of their outstanding shares for the trailing 12 months. Simply put, this ETF is focused on companies that are reducing their outstanding share float which can act as an enticing proposition to shareholders in boosting the stock price. Repurchasing shares is seen as an alternative to paying dividends with excess cash from operations.
PKW currently has over $1.7 billion in 199 individual stocks that encompass nearly every sector of the market. The fund is primarily large-cap weighted with over 65% of the assets in companies such as ConocoPhillips
(NASDAQ:AMGN), and Oracle
(NYSE:ORCL). The expense ratio of PKW is high at 0.71%, which is nearly 8x more than the meager 0.09% fee you will pay to own the SPDR S&P 500 ETF
(NYSEARCA:SPY). However, the results of this innovative strategy have been well worth the premium price tag.
Over the last year, PKW has added an additional 13% in total return over the SPY. In addition, the table below shows just how much the NASDAQ Buyback Achievers Index has outperformed the S&P 500 Index over the last one, three, and five years.
*Data as of 9/30/13 according to powershares.com
Index History (%)
NASDAQ US Buyback Achievers Index
S&P 500 Index
According to Index Universe
, PKW has added over $1 billion in assets this year alone which is a testament to the increasing demand for stocks that are using capital to repurchase shares. The value in this ETF is that you are able to quickly access a diversified portfolio of companies with a similar shareholder focus in a single investment vehicle. Because PKW is broad and well balanced, this holding can be a perfect substitute or addition to a core portfolio holding
Another similar strategy that is worth mentioning is the TrimTabs Float Shrink ETF
(NYSEARCA:TTFS) which screens the Russell 3000 Index
(INDEXRUSSELL:RUA) and selects 100 stocks with shrinking float, increasing free cash flow, and not increasing their leverage ratio. The fund manager believes these characteristics are often associated with superior long-term performance. This ETF has a slightly higher expense ratio of 0.99% annually and according to the latest data is more overweight in mid- and small-cap stocks than PKW.
The data certainly seems to support the theory that buybacks are a value-added bonus for investors seeking growth through capital appreciation. In my opinion, PKW deserves a spot on your watch list for potential inclusion on a pullback in price. With the volatility surrounding the debt ceiling deadline, that opportunity may come sooner rather than later.
Read more from David Fabian, Managing Partner at FMD Capital Management:
The Politics of Investing: Countdown to the Next Crisis
Four Must Watch Trends in Fixed-Income ETFs
5 Mistakes to Avoid With Your ETF Portfolio
No positions in stocks mentioned.