By Fannie Wurtz, Amundi – The development of Smart Beta solutions has become a major field of innovation in the ETF industry: the wide range of both mono and multi-strategy ETFs allows investors to benefit from a broad choice of tools to meet different investment needs and weather changing market conditions. In the case of ETFs which track Buyback indices, investors may be able to access significant yield through a return-oriented filter to the underlying investment universe. Furthermore, stock selection can be improved with an equal-weighting scheme applied by the index provider to ensure unbiased exposure to the underlying theme.
Buyback ETFs: a return-oriented investment strategy
Buyback indices are designed to include stocks of companies which have chosen to apply an own-stocks repurchase policy, thus reducing the amount of outstanding shares and returning value to shareholders. Buyback programs are, therefore, a form of remuneration for existing shareholders, alternative to dividends.
Following the buyback theme is compelling for many reasons: first of all, it boosts EPS (Earnings per Share) by deploying cash. Moreover, a buyback program is more tax efficient for the company than dividend payouts, as the money is directly spent by the company in the market but no cash is paid directly to shareholders.
Furthermore, ETFs tracking buyback indices provide access to a basket of companies with shareholder friendly management, willing to return capital to investors; companies that run share buyback programs are normally in good financial health, present undervalued shares or have excess cash on the balance sheet. This creates a de facto quality filter.
Buybacks have been a very popular shareholder remuneration policy in the US since the 1990's1, Current market conditions could lead to a similar trend in European and Asian markets in coming years, aided by the low interest rate environment and liquidity, provided by local QE policy.
An improved attention to risk
Many of the buyback indices currently available apply Equal Weighting methodology, a Smart Beta filter that aims to help improve long-term performance by reducing bias towards the largest individual companies. Equal weighting Smart Beta strategies are a useful way to diversify portfolios by providing more balanced exposure to risk factors. This is particularly relevant when investing in markets where companies performing buyback policies can have a high risk of concentration.
Moreover, the use of ETFs allows investors to reduce the cyclical specificities of the buyback investment theme, as the periodic rebalancing of the index gives automatic and constant access to the companies performing buyback policies in the period, so as to capture long-term equity market performance.
Amundi’s strength in Smart Beta
Amundi is fully committed to finding specific solutions to client needs and its broad range of mono and multi factor Smart Beta ETFs make it one of the major players in the European Smart Beta ETF market2.
At Amundi ETF, all innovations are client driven. We take a pragmatic approach to innovation and it represents one of the central pillars of our focus, alongside quality products and competitive pricing3. Amundi ETF launched the first ETF in Europe tracking the S&P 500 Buyback Index in February 2015.
1 Source: S&P – 31/12/2014.
2 European ETF Monthly Report, June 2015 – Deutsche Bank.
3 Transaction cost and commissions may occur when trading ETFs.
Financial promotion issued by Amundi, an investment manager regulated by the AMF under N° GP 04000036. Registered office address: 90, Boulevard Pasteur 75015 Paris Cedex 15 – France – 437 574 452 RCS Paris.
