Every company intends to create value for its stakeholders. Most investors focus on dividends and stock buyback program on long-term value realization. Also, this strategy gives protection to investors against stock market volatility.
Probably, this is why, iShares recently planned a new product, namely iShares U.S. Dividend and Buyback ETF.
Inside the Proposed Fund
As per the prospectus, the fund looks to tracks the Morningstar U.S. Dividend and Buyback Index. It takes care of companies that return capital to their shareholders, in terms of dividend payments or share buybacks. The methodology picks equities of companies with the largest dividend and buyback programs in terms of dollar.
In a nutshell, the index picks companies that represent the top 90% of payout dollars returned to investors. As of June 30, 2017, a considerable portion of the index goes to the consumer discretionary, financials and information technology sectors. The ticker code and expense ratio of the fund are yet to be disclosed.
How Does it Fit in a Portfolio?
Buyback activity had a subdued start to 2017. The companies’ stock buyback fell 17.5% year over year and 1.6% sequentially to $133.1 billion in the first quarter of 2017. Superb market rally on Trump-induced optimism is believed to have held companies back from indulging in share repurchase (read: Warning Signs for Buyback ETFs?).
But U.S. companies are sitting on huge cash balances, thus being at ease when it comes to buying back their shares. Citi strategists believe that “the US has become a capital-lite and distribution-heavy stock market” and estimates buybacks and dividends to be $895.6 billion this year, slightly lower than $957.9 billion projected for investments.
If the broader market sees some correction ahead and stocks fall, companies may resume buyback. Also, investors who are looking for steady current income, may find this fund lucrative.
iShares seems to be a little late entering the industry. There are already products in the buyback space. These are PowerShares Buyback Achievers Portfolio PKW, which looks to track companies that have implemented a net reduction of 5% or more in shares outstanding in the last 12 months (see Total Market (U.S.) ETFs here).
Another buyback ETF is SPDR S&P 500 Buyback (NYSE:) ETFSPYB, which measures the performance of the top 100 stocks with the highest buyback ratio in the S&P 500 in the last 12 months. Yet another fund AdvisorShares Wilshire Buyback ETF TTFS looks to generate long-term capital appreciation.
As far as dividend ETFs are considered, there are products aplenty in the market. In this context, the proposed fund may get competition from the likes of SPDR S&P Dividend (P:SDY_OLD) ETF (TO:) , ProShares S&P 500 Aristocrats ETF (BO:) and Schwab US Dividend Equity ETFSCHD.
However, since iShares’ newly filed fund targets both traits at a time, it has a fair chance of garnering investors’ attention, if approved.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>