Despite the patient wait-and-see approach to executed buyback plans, this ETF has racked up some solid numbers. The PowerShare Buyback Achievers Fund (ETF) (NYSEARCA:PKW) outperformed the S&P 500 index on a one-, three- and five-year basis. The 15% annualized return over the past five years (which includes the horrendous market action of late 2008 and early 2009) makes this ETF one of the top-performing domestic large-cap ETFs around. The 0.7% expense ratio is reasonable in light of that robust performance.
2. AdvisorShares Trust (NYSEARCA:TTFS)
You can understand why investment research firm TrimTabs got into this niche. The firm has been tracking fund flows for nearly two decades on the belief that share prices rise and fall directly as a result of the underlying supply and demand for shares. Indeed, TrimTabs’ “Liquidity Theory” rests on two basic principles: “Increasing supply of stocks can be a bearish sign for stocks,” and “increasing demand is positive for stocks, except when flows become extremely high as investors chase momentum.”Buybacks play a key role in that logic, cutting the supply of shares while also boosting demand for them (as companies take them off the hands of other investors to retire them).
This ETF was launched less than two years ago and hasn’t built up the long-term track record of the PowerShare Buyback Achievers Fund (ETF) (NYSEARCA:PKW). But the 68% gain since its October 2011 launch beats the S&P 500’s 49% gain in that period.
The AdvisorShares Trust (NYSEARCA:TTFS) takes a slightly novel approach, focusing only on those companies that are buying stock out of free cash flow, and not from debt issuance.
It’s debatable whether this approach reduces risk (as is intended), as companies that seek to issue debt to buy back stock typically have strong cash flow characteristics anyway. The judicious use of debt can help boost profits, and the only time such firms are imperiled is when the economy slumps badly.
As a result, this is likely the safer ETF in a bleak economy. This ETF also does a better job of avoiding portfolio concentration. For example, top holding Las Vegas Sands Corp. (NYSE:LVS), accounts for just 1.13% of its assets. The 0.99% expense ratio is a bit stiff.
Risks to Consider: These are bull-market ETFs. The PowerShare Buyback Achievers Fund (ETF) (NYSEARCA:PKW) slumped badly in late 2008 and early 2009, and the TrimTabs would likely also fare poorly in a falling market.
Action To Take –> The distinct approaches taken by these ETF providers each has real merit. Yet neither is ideal. It’s a shame that the PowerShares fund decides to wait a full 12 months before snapping up shares of holdings, and the TrimTabs ETF’s focus on cash-flow-fueled buybacks shrinks its potential universe. But both of these ETFs appear built to deliver solid gains as long as the buyback frenzy continues.
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