The SPDR S&P Bank ETF (KBE) is up 3.5% since the CCAR results were announced while each of those three big banks is up roughly 5%.
With many of the banks rallying following those buyback announcements, I received a couple of questions this week regarding the SPDR S&P 500 Buyback ETF (SPYB) and whether or not it might be a good way to capture the supposed alpha that surrounds these announcements. It’s a small fund (just $8 million in total assets) so there are some liquidity and tradeability concerns, but to see if the Buyback ETF might be a good option for investors, we first need to understand how the portfolio is constructed.
The fund looks to target the 100 companies from the S&P 500 that have the highest buyback ratios over the past 12 months. I immediately see a couple of problems with this methodology. First, the fund invests in companies using a backwards looking metric. In the case of the big banks, much of the initial pop occurred after the buyback was first announced. The Buyback ETF reconstitutes itself every quarter so it’s possible that these companies might not even show up in the fund until three months after the buyback was announced (note: Citigroup and Morgan Stanley already appear in the fund based on past activity, but Bank of America does not). At that point, one could argue, any effect from a buyback announcement is likely priced in.
Since the fund’s launch in early 2015, the fund’s strategy hasn’t delivered. Its total return of 17% trails the S&P 500’s return of 25%. Year-to-date, the fund also trails the S&P 500 by about 150 basis point.
Perhaps the bigger question though is do buybacks actually work? Some would argue that buybacks are more often accounting tools used to manipulate the financial statements than the best path for increasing shareholder value. When companies buy back their own shares, it reduces the overall float and, thereby, improves earnings per share and potentially other financial metrics. It’s not necessarily indicative of better corporate performance, but it often looks that way and can affect things such as executive compensation.
Another issue is whether or not a buyback is the best use of available capital. In some cases it is, but in many it may suggest that the company doesn’t have better growth or investment opportunities available. Buybacks also tend to take place when the market is nearing highs and rarely when the market is down, violating the well-known investing rule to buy low and sell high.
At a high level, I don’t feel like stock buybacks are the beneficial event that they’re often made out to be. They may provide a modest bounce in the short-term, but over the long-term they haven’t proven to be a significant value-added proposition. Given that the Buyback ETF invests in companies that have completed buybacks as far as one year in the past, I’m skeptical that this fund’s investment strategy can consistently deliver above average returns.
The SPDR S&P 500 Buyback ETF (NYSE:SPYB) closed at $56.05 on Friday, down $-0.14 (-0.25%). Year-to-date, SPYB has gained 6.88%, versus a 8.31% rise in the benchmark S&P 500 index during the same period.
David Dierking is a freelance writer focusing primarily on ETFs, mutual funds, dividend income strategies and retirement planning. He has spent more than 20 years in the financial services industry and his background includes experience in investment management, portfolio analytics and asset/liability management at both BMO Financial Group and Strong Capital Management.
He has written for Seeking Alpha, Motley Fool, ETF Trends and Investopedia and was also included in the panel for ETFReference.com’s “101 ETF Investing Tips from the Experts”. He has a B.A. in Finance from Michigan State University and lives in Wisconsin with his wife and two daughters.