Buybacks: PowerShares Buyback Achievers ETF (PKW)
I’ll start with the oldest buyback-focused ETF, the PowerShares Buyback Achievers ETF (PKW).
PKW tracks the NASDAQ U.S. Buyback Achievers Index, and its methodology is strict. In order to make the cut, a company must have effected a net reduction in shares of 5% or more in the trailing 12 months. The ETF and its index are reconstituted annually in January and rebalanced quarterly in January, April, July and October. Also, to be considered, a stock must trade on the NYSE or NASDAQ and have average daily cash trading volume of $500,000.
That 5% is a pretty impressive hurdle. But there is one aspect I don’t particularly like: PKW focuses only on the preceding year and makes no consideration for companies that consistently buy back their shares over time.
I’m also somewhat ambivalent about its weighting methodology. The ETF is market-cap weighted (like the S&P 500), though the maximum weight of any single holding is capped at 5%. While not a “bad” weighting strategy, per se, I might have preferred to see the companies weighted by the size of their buyback rather than by market cap. After all, the entire purpose of the ETF is to get exposure to companies aggressively buying back their own shares.
Still, all things considered, PKW is a solid investment option that has soundly beaten the S&P 500 since its creation in 2006. Its underlying index trounced the S&P 500 with annualized returns of 9.8% vs. 6.1%. Even after allowing for taxes, the ETF returned 7.2% annualized. Not bad at all. Expenses for PKW run 0.71%, or $71 for every $10,000 invested.