ETF Strategies That Topped Benchmarks
The recent returns may have been unusually high because of peculiar conditions in the financial markets, says Ryan Issakainen, ETF strategist for First Trust. In the years after markets collapsed in 2008, few IPOs appeared. Investors were too nervous to bet on new companies. Most of the IPOs that did make it to market were for companies that had solid balance sheets.
"Since the financial crisis, the IPOs tended to be very strong companies that have gone on to do well," Issakainen says.
Some investors have long favored companies that are buying back their stock. When a company repurchases stock, the total number of shares is reduced, so that earnings per remaining share can increase. That tends to prop up share prices.
Besides delivering outsized returns, buyback stocks can be relatively stable. The strategy has enabled PowerShares Buyback Achievers to return 28.1% annually during the past five years.Holdings in the buyback ETF include reliable cash generators, such as software giant Oracle (ORCL) and defense contractor Northrop Grumman (NOC). "Companies that have the cash to do buybacks tend to have healthy balance sheets and be confident about their future," says Joe Becker, product strategist at Invesco PowerShares. Ford Equity Research, which designed the benchmark used by PowerShares, includes only companies that bought back 5% or more of their stock in the preceding 12 months. While all companies that do buybacks tend to excel, those that make the biggest buybacks have delivered outsized returns. Investors have long known that spinoffs can outperform. These occur when a company with several divisions decides that its stock is undervalued. To boost prices, management transforms one of the divisions into a standalone subsidiary and distributes stock in the unit to existing shareholders. When the spinoffs first begin trading as public companies, they often sink as shareholders dump the little-known stocks. Gradually the spinoffs revive and thrive. In some cases, new managements excel because they are no longer shackled by corporate bureaucracies that may not have focused on a minor division. During the past five years, Guggenheim Spin-Off returned 35.2% annually. The fund includes companies that have been spun off in the past 30 months. The portfolio holds 33 stocks, including Kraft Foods (KRFT) and online travel company TripAdvisor (TRIP). At the time of publication, the author had no position in any of the stocks or funds mentioned. Follow @StanLuxenberg This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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