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Buyback ETF Simplifies a Complex Investment

The fund buys shares of companies that have bought back shares in the last 12 months. It's beating the S&P 500, too.

The PowerShares Buyback Achievers Portfolio Fund (PKW) - Get Invesco Buyback Achievers ETF Report holds only companies that invest in themselves, and can simplify investment in that area.

The fund tracks the Share BuyBack Achievers Index. The Index is designed to track the performance of companies that meet the requirements to be classified as "BuyBack Achievers".

The BuyBack Achievers Index is currently comprised of stocks of approximately 254 companies selected by Mergent, Inc. To make it into the Index, a company must be incorporated in the U.S., trade on a U.S. exchange and must have repurchased at least 5% of its outstanding shares for the trailing 12 months.

Year-to-date, the Buyback Achievers Fund is down 9.7%. This performance compares favorably to the 12.5% slide of the

S&P 500

and the 10.9% decline in the average Large Blend fund.

The ETF is most heavily weighted in consumer discretionary, IT, financials and health care. It gives shareholders an interest in blue chip stocks such as

Exxon Mobil

(XOM) - Get Exxon Mobil Corporation Report

,

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

,

Honeywell International

(HON) - Get Honeywell International Inc. (HON) Report

,

International Business Machines

(IBM) - Get International Business Machines (IBM) Report

,

Pfizer

(PFE) - Get Pfizer Inc. Report

and

Walt Disney

(DIS) - Get Walt Disney Company Report

.

The idea for the index sprang from a study conducted by

TheStreet Recommends

Ford Equity Research

, which showed that companies with a shrinking number of shares outstanding tended to produce excess returns, experience low volatility and perform well in down markets. The study pointed to high internal rates of return and excess cash flow as likely contributors to this positive trend.

The findings from the study, coupled with investor feedback, led to the launch of the Buyback Achievers Fund in December 2006.

The ETF proved to be an ideal fit in the PowerShares lineup.

"At the time, dividends were the rave, but we had some investors that preferred investments that didn't have the tax consequences of dividends," says Ed McRedmond, Senior Vice President of portfolio strategies for Invesco PowerShares. "The Buyback Achievers Fund also seemed to be a nice complement to our

Dividend Achiever Portfolio Fund

(PFM) - Get Invesco Dividend Achievers ETF Report

."

The Buyback Achievers Fund is classified as a Large Blend Fund by Morningstar. This is the same peer group that ETFs that track the S&P 500 fall into such as the

SPDRs

(SPY) - Get SPDR S&P 500 ETF Trust Report

and the

iShares S&P 500 Index Fund

(IVV) - Get iShares Core S&P 500 ETF Report

.

About two-thirds of the Buyback Achievers Fund is allocated to large cap stocks. The remainder of the fund is invested in mid cap and small cap names. It has approximately 310 holdings and the expense ratio is about 0.7%. The fund is rebalanced on a quarterly basis and reconstituted on an annual basis.

Complex Strategy Made Easy

One of the advantages of this ETF is that it simplifies what might otherwise be a cumbersome process.

"It would be difficult for individual investors to implement this strategy on their own," says McRedmond.

Also, "the Buyback Achievers Index is based on actual share repurchases rather than on announced share buybacks which may never materialize," says Bill Rogers, Director of Equity Analysis for

Mergent

.

This ETF would be one to consider for long-term investors who are more interested in capital appreciation, as opposed to dividend payments.

"Certain investors, for their own personal needs, would rather have the cash flow from dividends instead of having companies using that cash to repurchase shares," says McRedmond. "If your focus is on the cash flow from dividends, this ETF might not be at the top of your list."

One point for potential investors to keep in mind about the Buyback Achievers Fund is its composition.

"The index is weighted using a modified market cap weighting scheme so that no single holding can be more than 5% of the index on the annual reconstitution date," says Rogers. "And because buybacks are a company-specific event, the mix of companies will change over time, causing the investor to have a different sector mix from period to period."