Canadian exchange-traded fund provider First Asset has introduced the First Asset Canadian Buyback Index ETF (Toronto: FBE) and the First Asset US Buyback Index ETF (Toronto: FBU), providing access to portfolios of equity securities of quality companies with active share buyback programs.
FBU and FBE invest in US and Canadian companies respectively which have displayed significant share repurchases over the past two years as well as consistency in regularly offering share buybacks.
Companies who engage in buyback programs typically demonstrate several characteristics which are beneficial to investors – strong cash flow positions to finance the purchases, lower share price volatility, sustainable leverage ratios, and better multiples such as price-to-earnings or price-to-sales. Additionally, share buybacks are typically more tax efficient than dividends, helping to maximise shareholder value.
A criticism of share buybacks however is that firms which engage in the practice may be lacking profitable new business opportunities in which to invest free cash flow, suggesting that company growth may be dampened in future periods.
The funds tracks indices created by CIBC, a Canadian Schedule I bank whose indexing department specialises in quantitative strategies for Canada and the US. FBE tracks the CIBC Canadian Buyback Index and FBU tracks the CIBC US Buyback Index.
Barry Gordon, President and Chief Executive Officer, First Asset, commented: “For the first time, CIBC’s Proprietary Equity Index Strategies will be available to retail investors through ETFs. The First Asset Canadian Buyback Index ETF and First Asset US Buyback Index ETF represent an excellent opportunity to invest with a unique strategy that favours high quality firms, while also enjoying the benefits of the ETF structure, including transparency, tax efficiency, liquidity and low cost.”
Each index’s ‘parent universe’ consists of all US-listed or Canadian-listed stocks excluding the lowest half by market capitalization and the lowest half by average trading volumes.
Remaining stocks are then ranked according to their combined score across two factors: ‘share count reduction’ – calculated as the percentage reduction in number of common shares over the past two years, and ‘buyback consistency’ – a quantitative measure which rewards firms for regularly engaging in buybacks. The top 40 performing stocks form the final portfolios. The methodology employs a smart beta approach by equally weighting its constituents.
First Asset Canadian Buyback Index ETF
As of 31 August 2016 FBE’s largest sector exposures are to financials (28.9%), energy (12.9%), consumer staples (12.7%), industrials (12.5%) and materials (9.3%). Using back-tested data the index is up 6.9% year-to-date and 10.1% per annum over the past five years. In staying true to its lower price volatility characteristic, the index has displayed a beta of 0.79 versus the S&P/TSX Composite TR Index since June 2000, with an annual standard deviation of 12.5%.
Source: First Asset.
Source: First Asset.
First Asset US Buyback Index ETF
FBU’s largest sector exposures are to consumer discretionary (31.8%), financials (20.4%), information technology (18.6%), and industrials (12.5%). Using back-tested data the index is up 8.1% year-to-date and 18.7% per annum over the past five years. It has also shown less price volatility than the broad market, displaying a beta of 0.93 versus the S&P 500 TR Index since June 2000. Its annual standard deviation over this period has been 15.9%.
Source: First Asset.
Source: First Asset.
Each fund has a total expense ratio (TER) of 0.60%.
European investors who wish to take advantage of the buyback investment strategy may consider the PowerShares Global Buyback Achievers UCITS ETF (LON: BUYB), which tracks the NASDAQ Global Buyback Achievers Index. The index represents the market cap-weighted performance of global firms that have effected a net reduction in shares outstanding of 5% or more in the last calendar year.
As of 14 September 2016, the fund has 246 constituents and the largest country exposures are to the US (58.3%), Japan (17.8%), Canada (7.0%) and Russia (5.4%). The largest sector exposures are to consumer discretionary (23.4%), industrials (18.1%), information technology (16.1%), financials (13.0%) and healthcare (11.6%). The ETF’s TER is 0.39%.