The evolution of the ETF industry has spawned numerous vehicles that offer an opportunity for investors to tap into core asset classes with a twist. One such product that splashed onto the scene in early 2014, which warrants a closer look under the hood, is the PowerShares International BuyBack Achievers Portfolio (IPKW ).
Inside IPKW's Strategy
IPKW builds off the success of an existing PowerShares product, the BuyBack Achievers ETF (PKW ), which has amassed more than $2.7 billion in assets under management since launching at the end of 2006. IPKW differs in that it offers an international twist on the buyback strategy made popular by PKW.
The buyback-focused strategy employed by both PowerShares ETFs is quite straightforward: in order for a security to become eligible for inclusion in the underlying basket of holdings, the company must have repurchased at least 5% or more of its outstanding shares over the trailing 12-month period. In essence, this type of strategy looks to focus on equities with a shrinking supply given that it includes only those who have seen their number of shares outstanding decrease by a meaningful amount or more over the past year.
While share buybacks are a much debated topic in the investment world, it’s undeniable that those companies that are more aggressive in repurchasing their own stock increase the odds of price appreciation for their shareholders.
See also ETF Rapid Fire: 25 Unique ETFs You May Have Missed.
Considerations on IPKW's Performance
IPKW tracks a basket of foreign equities with a major tilt towards securities from developed markets. As such, this ETF can be expected to trade alongside broad-based equity benchmarks, more specifically the MSCI EAFE Index.
Because of its strategy, IPKW’s underlying portfolio is inevitably much more concentrated than that of a broad-based fund like the iShares MSCI EAFE ETF (EFA ). Thus far, this approach has resonated well for the ETF as it has managed to outperform its broader counterpart, EFA, since its launch in early 2014.
Consider the performance comparison chart below for these two ETFs:
Despite managing to outperform EFA over the past year, IPKW can be expected to trade in-line with other major foreign equity indexes over longer periods of time.
How to Use IPKW in a Portfolio
It’s difficult to say exactly whether IPKW is more of a core or a tactical holding. For starters, this ETF does offer exposure to a core asset class: foreign equities, primarily from developed nations. On the other hand, it taps into this core asset class with a twist, resulting in a much more concentrated portfolio than similar broad-based instruments that also target foreign stocks.
Those who believe in the merits of the buyback-focused strategy will consider this ETF an excellent core holding in their portfolio; in fact, this is the only ETF of its kind aside from PKW that is focused exclusively on domestic securities. However, for more cost-conscious investors, this ETF is less-than-ideal because it boasts an above-average expense ratio for its category, and as such, is likely best characterized as a tactical holding.
The Bottom Line
IPKW builds off the success of its predecessor PKW, which popularized the buyback strategy in the ETF wrapper. For anyone looking to tap into overseas equity markets, but wishes to stray away from traditional broad-based funds, this ETF certainly warrants a closer look under the hood. As always, be sure to do your own homework to determine whether or not this ETF fits into your overall strategy before making an allocation.
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Disclosure: No positions at time of writing.
