On the surface, targeting stocks that have repurchased their shares may seem like a good strategy. Stock buybacks are a sign of strong profitability and shareholder-friendly management teams who understand that their employers may have better investment opportunities than they do. And they are a more tax-efficient means of returning cash to shareholders than dividends, as they create tax bills only for sellers. But share purchases in one period may not continue in the next, and they aren’t necessarily a sign that the shares are undervalued.
Invesco BuyBack Achievers ETF (PKW) has built a solid record by selecting stocks based on short-term repurchasing activity. Firms that repurchase their shares tend to be highly profitable, but there is little to suggest that past repurchasing activity is predictive of future performance after controlling for profitability. There are cheaper and more direct ways to get exposure to highly profitable stocks. The fund warrants a Morningstar Analyst Rating of Neutral.
Alex Bryan, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.