S&P Dow Jones rolls out S&P 500 Buyback Index

May 14th, 2013 | By | Category: ETF and Index News

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S&P Dow Jones Indices has unveiled the S&P 500 Buyback Index, a new index tracking the performance of the S&P 500 Index constituents with the largest stock buyback programmes. The index has been designed to underlie index-linked products such as exchange-traded funds (ETFs).

S&P Dow Jones unveils S&P 500 Buyback Index

S&P 500 companies bought back $399 billion worth of stock in 2012.

The methodology behind the index is refreshingly simple. Essentially, the index measures the performance of the top 100 stocks with the highest buyback ratio in the S&P 500 in the last 12 months.

S&P Dow Jones defines the buyback ratio as the ratio of the total cash put towards buybacks in the trailing year and the market capitalisation of the company as of a reference date.

Constituents are then equally weighted and the index is rebalanced quarterly. The index includes many well known names, such as CocaCola, Goldman Sachs, Johnson & Johnson, Time Warner and Yahoo.

Similar to dividends, buybacks can serve as a way to return value to shareholders. However, unlike dividends, buybacks are not tied to a pre-announced policy and they can give management leeway in terms of timing, hopefully to further enhance shareholder value. Historically, companies that have returned value to shareholders through buybacks have generally outperformed the overall market.

Vinit Srivastava, Senior Director of Strategy Indices at S&P Dow Jones Indices, said: “Buybacks can be seen as an important indicator of corporate health. Much like dividends, corporate buybacks is another method that companies use to return value back to shareholders. In 2012, S&P 500 companies bought back $399 billion worth of stock, and continue to hold record amounts of cash.”

Based on historic data, the index has performed very strongly, outperforming its parent index, the S&P 500, over one, three and five years. Over the five-year period to 13 May 2013, the S&P 500 Buyback Index has posted an annualised total return of 11.57% per annum, compared to the S&P 500, which has delivered an annualised return of just 5.42% pa.

The newly launched index will likely come up against the Nasdaq US BuyBack Achievers Index, underlying index to the $483 million NYSE Arca-listed PowerShares Buyback Achiever Portfolio ETF (PKW).

The Nasdaq OMX Global Indexes benchmark is weighted by modified market capitalisation and measures the performance of all eligible US securities (based on various liquidity and listing criteria) that have repurchased 5% of their outstanding shares in the trailing 12 months. Major holdings currently include Oracle, Amgen, ConocoPhilips, AIG and Time Warner.

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