Making Money Alert
ETF Talk: Buyback Fund Bets on Management
09/07/2011
A sign of confidence is reflected by the management of any company that uses a portion of its available cash to buy back a significant number of the company’s shares on the open market. The buyback strategy traditionally is a signal that management believes the best investment available is its own company. The concept is used by an exchange-traded fund (ETF), PowerShares Buyback Achievers Portfolio ETF (PKW), which follows an index that features a broad range of companies that are buying back their own shares.
The ETF is based on the Share Buyback Achievers Index, which tracks a special group of companies that are only eligible for inclusion if they have repurchased at least 5% or more of their outstanding shares for the previous 12 months. The fund is rebalanced and reconstituted annually. I am among those who like when a management team buys back its own shares, since it indicates favorable future performance is expected. These buybacks are highly calculated moves by the management of a company that should know its organization and its prospects as well as anyone.
The ETF essentially rises and falls on the performance of the companies that have management teams that are confident enough to repurchase their own shares. PKW’s top 10 holdings, and the percentage of the portfolio held in each, as of September 6, 2011, are: Wal-Mart Stores Inc., 5.43%; International Business Machines Corp., 5.09%; Amgen Inc., 4.76%; UnitedHealth Group, 4.73%; Bristol-Myers Squibb Co., 4.53%; Hewlett-Packard Co., 3.59%; Target Corp., 3.17%; Walgreen Corp., 3.14%; DIRECTV, 3.00%; and Time Warner Inc., 2.89%. Clearly, no company accounts for much more than 5% of the portfolio, so the fund is reasonably well diversified. Fortunately, these are also companies we all know and that provide products that we use in our everyday lives.
The fund also is diversified among a number of sectors. The top sector allocations for PKW are: health care, 29.32%; consumer discretionary, 23.19%; information technology, 20.13%; consumer staples, 12.78%; and financials, 7.48%. As these percentages show, no sector dominates the fund. As a result, PKW offers further diversification.
The following chart shows that the fund has performed well during the past 12 months. Of course, it has pulled back in the past couple of months, along with much of the rest of the market. However, it has shown signs of climbing again, but each rise has been followed by a pullback thus far. If you are looking for an alternative investment strategy to deploy a small portion of your funds, PKW may interest you.
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