Solactive Launches Europe’s First Buyback Index

March 18, 2014

Independent index provider Solactive has launched Europe’s first buyback index, allowing investors to tap into an increasingly popular strategy in the US and in Europe.

The Solactive European Buyback Index will act as an underlying for index-linked products from Société Générale Corporate & Investment Banking (SG CIB).

A buyback is a way for companies to return cash to their shareholders by increasing earnings per share by purchasing their outstanding shares.

Steffen Scheuble, chief executive of German-based Solactive, said this index is a first in the European market.

“We looked at what strategies are gaining assets in the US – they tend to be buybacks, spin off and IPO [initial public offering] indices and there seems to be no similar offering at the moment in the European market,” he said. “From our perspective, it’s relatively clear that a company carrying out a share buyback programme believes this is the more attractive option, i.e. they consider the stock to be undervalued on the exchange.”

The index has a bias to the UK and Nordic countries, with more alpha generated from its weighting in small cap and value stocks.

It tracks companies in 16 western European countries which have announced a buyback in the last two months. Stocks must have a minimum market capitalisation of €500 million and an average trading value of €2 million over the last three months.

The components are weighted according to their buyback ratio, which is the sum of all shares bought back in the period divided by the number of shares outstanding at the beginning of the period.

Stephane Mattatia, Societe Generale CIB head of global equity flow engineering in Paris, said that a timeframe of two months for companies’ buyback programs had been chosen after studying research of how long it takes for buybacks to reflect positively on shareholders’ equity.

“Looking at the studies, there is no clear consensus [as to when buybacks reflect positively on share value],” he said. “Some studies say three months, whereas others say two or four years. We wanted to be as close as possible to the buyback announcement and so we chose two months.”

He added there are plans to develop products which track this index.

“We are working on a certificate and an ETN [exchange traded note] on the index and some options on it, as well as working towards potentially launching an ETF which would track this index,” he said.

The index had an annual return of 23.17 percent and a volatility of 17.98 percent between 28 November 2008 and 17 March 2014.

Solactive has most recently launched a Green Bond Index in partnership with Climate Bonds Initiative. The indexer also produced a benchmark that measures the performance of small and mid-cap stocks in Germany with db X-trackers this year.

 

 

Find your next ETF

Reset All