PowerShares Capital Management launched three new exchange-traded funds on the American Stock Exchange Wednesday, including one,
PowerShares Buyback Achievers Portfolio
, that plays on the dramatic rise in stock buybacks.
Stock-buybacks occur when a company repurchases its shares on the open market. This tends to boost stock prices by reducing the number of shares outstanding and increasing earnings per share.
Activity has really heated up over the last couple of years as companies are increasingly turning to buybacks over other methods of returning value to shareholders, such as paying out dividends.
According to index provider Standard & Poor's, the volume of buybacks among companies in the
topped $110 billion in the third quarter of this year, down slightly from a record $117 billion in the second quarter but up 35% from the third quarter of 2005, and up 140% from the third quarter of 2004.
PowerShares President Bruce Bond says that when companies buy back shares, they are basically signaling two positive things: They have additional cash on hand, and they believe their stock is the best investment available at that time.
He adds that companies tend to outperform the market in the months following a buyback.
The PowerShares Buyback Achievers Portfolio holds stocks of 167 companies of all sizes that have repurchased at least 5% of their outstanding shares for the trailing 12-month period. The stocks must also be incorporated in either the U.S. or a U.S. territory and trade on the
Bond says that companies aren't added to the index, which includes companies of all sizes, until they have completed their stock repurchases. While this means that investors may miss out on some of the stock's price appreciation, they also avoid buying shares of companies that announce buybacks but don't follow through.
In addition to the buyback ETF, PowerShares also launched two others,
PowerShares Dynamic Deep Value Portfolio
PowerShares Dynamic Aggressive Growth Portfolio
The PowerShares Deep Value Portfolio includes about 100 U.S.-listed stocks with deep value characteristics, while the PowerShares Aggressive Growth Portfolio tracks about 100 stocks in the aggressive growth segment of the market. Both ETFs use basically the same criteria to pick and rank the stocks, including fundamental growth, stock valuation, investment timeliness and risk factors.