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What Is In Store For Buyback ETFs Ahead?

Stocks with an increased buyback are usually investors’ favorites. With a low interest environment commanding most developed economies including the U.S., buybacks should surge and the related ETFs should beat out the broader market benchmark. But this did not happen in reality. In the last one year (as of May 3, 2016), buyback ETFs underperformed the S&P 500-based ETF SPY . During this frame, SPY lost 0.08% while buyback-oriented ETFs lost in the range of 6% to 7%. Let’s find out why. Buybacks lower the outstanding share count and thus increase earnings per share. Having said this, if companies are buying back their own shares at steep prices and accessing the debt market to finance that buyback, the move is less likely to be helpful, as indicted by Market Watch . After all, S&P 500 (ex-financials) companies’ cash position remained decent, but probably not great. Cash and short-term investments balance of those companies was $1.44 trillion at the end of Q4 (ended in January 2016), down 0.5% year over year. On a quarter-over-quarter basis, the figure was flat, as per FactSet. Of the nine sectors, seven recorded a year-over-year decline in their cash balances (Utilities sector was flat year over year). Moreover, the market was guilty of overvaluation concerns, forcing companies to repurchase their shares at higher prices than what they are actually worth. Probably this is why a waning momentum was seen in the buyback activity. Dollar-value share repurchases were $568.9 billion on a trailing 12-month basis (TTM), representing a 0.5% decline year over year and flat with Q3 (August-October), as per FactSet. In Q4 (November-January), dollar-value share repurchases were $136.6 billion, up 5.2% year over year but down 13.5% from Q3. The splurge on buyback has been the main driver of the market rally lately. If this activity cools down ahead, the broader market will likely feel the pain. Moreover, the Fed entered the policy tightening era in December 2015. Though the central bank is presently staying dovish on global growth issues, sooner or later the market will see further hikes in rates. And then, financing buybacks through debt would not be an easy task. So, investors should now be cautious while playing buyback ETFs. There are a couple of ETFs that focus on this niche strategy. PowerShares Buyback Achievers Portfolio (NYSEARCA: PKW ) is the most popular fund in the space, managing an asset base of $1.64 billion and trading in good volumes of 210,000 shares a day. PKW tracks the NASDAQ US BuyBack Achievers Index, which comprises companies that have repurchased 5% or more of their common stock in the trailing 12 months. The fund holds a basket of 232 stocks and charges 64 basis points as fees (see Total Market (U.S.) ETFs here ). Another buyback ETF SPDR S&P 500 Buyback ETF (NYSEARCA: SPYB ) tracks the performance of the top 102 stocks with the highest buyback ratio in the S&P 500 over the last 12 months. The fund charges 35 bps in fees. The fund has about $9.4 million in assets. In Conclusion Having said this, we would like to note that both the ETFs outperformed SPY in the last three months (as of May 3, 2016). So, it can be said that the languishing trend has recovered to some extent. Also, both SPYB and PKW have a decent relative strength index, below 50. This indicates these funds are yet to reach the overbought levels. The products can thus be played for a few more days, though with a strong stomach for risks. Original Post

Closed-End Funds: Still A Bargain

In a world in which very little is cheap and most mainstream stocks and bonds offer little in the way of expected returns, closed-end funds have been a fantastic source of value. I’ve been writing about closed-end funds for the better part of a year (see Closed-End Bond Funds Near Their Deepest Discounts Since 2008 ) and I’ve been very pleased with their performance in an otherwise choppy, directionless market. Yet I’ve noticed that some of the fantastic bargains I saw a year ago are starting to dry up. Or at least they’re not quite as juicy as they were. The 15% discounts to net asset value are now closer to about 10%. Though it may simply be a case of me getting spoiled. By any historical standard, closed-end funds are still exceptionally well priced. Patrick Galley, manager of the Rivernorth DoubleLine Strategic Income Fund, gave his thoughts to Barron’s this past week. (See 4 Closed-End Funds Yielding Up to 9% ): Q: Closed-end fund discounts have come in a lot since the beginning of the year. Aren’t they getting less attractive in general? A: Actually, closed-end fund discounts are still pretty attractive overall. In January and February they got so wide it was reminiscent of 2008. Fear was high and investors were dumping assets. Discounts got to the 98th percentile of the widest levels they’ve reached going back to 1996. They narrowed in March and April. Now they are at the 76th percentile of the widest levels. The averages are very much skewed by the muni-bond sector. Munis have had a good run and everyone wants them. Investors are chasing those past returns. They aren’t even looking at discounts and premiums. Meanwhile, taxable fixed-income spreads are still wide. As the examples I gave you show, a lot of them are still double-digit discount opportunities. 76th percentile is nothing to complain about. Sure, it was a lot more fun buying them at 2008-caliber discounts. But that’s really not normal, and every buying opportunity can’t be that good. So for the time being, I’ll plan on maintaining a solid allocation to closed-end funds in my Dividend Growth portfolio. The portfolio is up 13.5% year to date , and closed-end funds have certainly played their part in achieving those returns. This article first appeared on Sizemore Insights as Closed-End Funds: Still a Bargain Disclaimer : This site is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.

Buy-And-Holders Predict Future Returns Every Day, While Claiming That Predictions Don’t Work

By Rob Bennett Buy-and-holders don’t believe in return predictions . They say it is not possible to predict returns effectively. Their cardinal rule is that investors should never engage in market timing, and so they object strongly when valuation-informed indexers use return predictions to change their stock allocations. That’s market timing. It doesn’t work. It’s crazy. It’s a mistake. They believe this stuff. They are sincere in their repulsion for market timing and for return predictions. But the buy-and-holders make return predictions themselves! They don’t know it. They fool themselves into thinking they are not making return predictions. But it’s not possible to buy stocks without first forming some idea in your mind as to what return you expect to obtain. The buy-and-hold idea that it is not a good idea to make return predictions is not only strategically flawed, it is a logical impossibility. Say you were thinking of buying a car, and for some odd reason you vowed not to consider price when doing so. Could you do it? You could physically do it. But you couldn’t do it with a clear mind. Human reason demands of us that we consider price when trading money for something that we want to obtain. It works that way with stocks too. It’s not possible to buy stocks without the thought entering your head that you would like to obtain a return on your money that is greater than the return you could obtain from buying less risky asset classes. And it’s not possible to go ahead with the purchase without some notion of what return you expect to obtain entering your thought process. The buy-and-holders kid themselves about this. They need to believe that return predictions are not possible or they could not remain buy-and-holders (buy-and-holders who elect to become clear thinkers are transformed into valuation-informed indexers!). But they are not able to keep themselves entirely in the dark. Common sense intrudes. That’s why buy-and-holders become uncomfortable when people like me write on the internet about the implications of the last 35 years of peer-reviewed research in this field. Buy-and-holders believe they are going to obtain a return of 6.5 percent real on their stock investments. That’s the average return. So that’s their default. They compare the 6.5 percent return they expect to obtain from investing in stocks with whatever return they can obtain from less risky asset classes and elect stocks when the expected return from stocks is better. It always is. That’s why buy-and-holders invest most of the money that they do not expect to need within a few years in stocks. Buy-and-holders, of course, understand that they are not going to see that 6.5 percent return every year. There are some years in which stocks provide a return of 30 percent, and there are some years in which stocks provide a return of a negative 30 percent. But a positive 6.5 percent is the norm. That’s what buy-and-holders expect. That’s what buy-and-holders predict. Ask a buy-and-holder what he expects his stock return will be after the passage of 10 years. He will say that he expects something in the neighborhood of 6.5 percent. He doesn’t expect precisely that. Of course, valuation-informed indexers don’t expect their predictions to apply precisely either. He view the predictions we make by looking at the valuation level that applies on the day we make our stock purchases as in-the-neighborhood numbers. That’s how buy-and-holders view their prediction that the usual 6.5 percent return will establish itself once again. The reality, of course, is that there is a strong chance the 6.5 percent return will not re-establish itself. It’s reasonable to expect such a return for stocks purchased at fair value prices. But stocks are frequently sold either at inflated prices or at deflated prices. When stocks are sold at wildly inflated prices or at wildly deflated prices, it is not likely that the 6.5 percent return will apply in 10 years. The likelihood is that a return a good bit lower than 6.5 percent will apply (for stocks purchased at wildly inflated prices), or that a return a good bit higher than 6.5 percent will apply (for stocks purchased at wildly deflated prices). A poster at the Bogleheads Forum once stated this idea in compelling fashion: “I don’t go into a bank and say ‘I’d like to buy three certificates of deposit’ without first asking what rate of return applies – Why should it be different when I buy stocks?” It shouldn’t be any different. We cannot know the return we will obtain from stocks with precision. But then, we cannot know the return that we will obtain from certificates of deposit with precision either. The inflation rate is unknown at the time of purchase of certificates of deposit, and the inflation rate affects the real return obtained. With certificates of deposit, we all do the best we can. We look up the nominal return and form some reasonable expectation of what inflation rate might apply. We educate ourselves to the best of our ability. This is the step that buy-and-holders fail to take when they buy stocks. Why? Buy-and-holders want to know the return they will obtain from the certificates of deposit they purchase. Why don’t they want to know the return they will obtain from the stocks they purchase? They want to believe in bull markets. They want to believe that the 6.5 percent average return is a floor that applies even when prices are insanely high, but that returns that exceed the 6.5 average return are real and do not pull future returns down. They want to believe in a fantasy that makes it impossible for them to purchase stocks in as informed a manner as they purchase certificates of deposit. Disclosure: None.