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ETF Specialist

Should You Buy Into This Buyback ETF?

This distinctive strategy has a strong record, but its high turnover, fee, and myopic selection criterion detract from its appeal.

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 PowerShares Buyback Achievers ETF (PKW) has built a strong record by selecting stocks based on short-term repurchasing activity. But share repurchases in one year may not carry forward to the next, so this approach can lead to high turnover and is not necessarily indicative of future repurchasing activity. Nor does it provide a holistic view of a firm's distributions to shareholders. The portfolio still ends up with a bias toward highly profitable and smaller firms, which has helped performance, but there are cheaper and more direct ways to get this exposure. Therefore, the fund earns a Morningstar Analyst Rating of Neutral.

The fund targets U.S. stocks that have reduced their shares outstanding by at least 5% in the previous year through share repurchases. It then weights these holdings by market capitalization, subject to a 5% cap. Firms that make the cut, such as  Boeing (BA),  Express Scripts (ESRX), and  Lowe's (LOW), tend to have strong profitability and shareholder-friendly management teams. Like dividends, a disciplined share-repurchase program can constrain managers from making low-return investments. However, share repurchases are less binding than dividend payments, so they may be less effective in constraining managers. Share repurchases can also hurt returns if managers overpay for their shares.

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Alex Bryan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.