Buyback Boom Not Benefiting ETF Investors

June 05, 2015

Stock buybacks are soaring, reaching new highs each year since the 2008 credit crisis, but that doesn’t mean investors who own buyback ETFs are raking in outsized returns. Quite the contrary, in fact.


The PowerShares Buyback Achievers Portfolio (PKW | B-95), for instance, is a $3 billion fund that invests in U.S. companies that repurchased at least 5 percent of their outstanding shares in the previous 12 months. The idea here is that a company knows the best valuation of its stock, so it knows best when it’s a good time to buy up some of its own stock. Buybacks are meant to boost share prices, and therefore returns, by cutting shares outstanding.


A different strategy in the space, the AdvisorShares TrimTabs Float Shrink ETF (TTFS | C-83), sets out to outperform the Russell 3000 by generating both higher returns and lower volatility using buybacks. The actively managed fund selects stocks based on three trends over the past 120 days: decreasing outstanding shares; increasing free cash flow; and shrinking leverage.


So far this year, TTFS has done better than PKW, but neither has really stood out against a simple allocation to the SPDR S&P 500 (SPY | A-100), as the chart below shows: 


Chart courtesy of


Buybacks aren’t doing much to translate into returns because share prices are already too high in many cases, some say. More than six years after the market bottomed, air at the top of this stock rally is getting rarefied. Instead, companies buying their own stocks are often underperforming the broader market.


“We are big fans of equity income investing and because of this, share buybacks—often the antithesis to dividend payments—are not exactly something we are keen on,” Andrew Lapthorne, of Societe Generale, said in a recent research note.


“Some may believe that a pick-up in share buybacks is indicative of an undervalued stock market. Nothing could be further from the truth—rather, it is the other way around,” Lapthorne added. “Companies execute buybacks when they are flush with cash, when cash flows are strong and as a consequence when share prices are elevated.”


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