Do Buybacks Lead to Better Returns?

NEW YORK (TheStreet) -- In the last couple of years, the term smart beta has made its way into the lexicon of exchange-traded funds.

The term refers to screening a broad-based index such as the S&P 500 for some sort of valuation or qualitative metric that seeks to offer a better return in either nominal or risk-adjusted terms.

ETF provider PowerShares has embraced the term, branding more than 40 of its funds as being smart beta. Some of its funds are considered to be smart beta for offering low or high volatility or for dividend screening. Then there is PowerShares Buyback Achievers Portfolio (PKW).

The basic argument for owning stocks in companies that buy back their shares is that the companies must generally be in good enough financial condition to execute a buyback. Buybacks are viewed as a return of capital to shareholders because a reduced share count increases the earnings per share of the remaining shares and potentially leaves more capital available for dividends.

The word achievers in the name of the fund refers to companies that have reduced their share counts by at least 5% over the trailing 12 months. The companies that meet the achievers threshold are weighted in PKW with a modified market-capitalization methodology where the largest weighting for any company will be 5% of the fund's assets.

The fund is now heaviest in the consumer-discretionary sector at 34%, followed by technology at 16% and financials and health care at 11% each.

The fund reconstitutes every January, and so from year to year, its makeup can change. The current sector allocation would likely leave the fund vulnerable to an economic slowdown as people tend to cut back on discretionary items during times of financial hardship.

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