Corporate share repurchases have skyrocketed this year compared with last year. Companies buy back their own stock when they believe their shares are undervalued or expect sales and earnings to improve.

The idea is to increase each share’s value as earnings are dividend among fewer shares.

An ETF designed to capitalize on buyback bonanzas AdvisorShares TrimTabs Float Shrink (ARCA:TTFS ) has beaten all of its peers and the market this year. The fund, with $56.2 million in assets under management, surged 28% year to date vs. 18% for the SPDR S&P 500 (ARCA:SPY ). Since its debut in the stock market in October 2011, it has appreciated 58% while the SPY has gained 43%.

Charles Biderman, chairman of Santa Rosa, Calif.-based TrimTabs Investment Research, developed the ETF and subadvises it.

IBD: What has driven TTFS’ outperformance this year?

Biderman: TTFS’ basic premise is that enterprise value should remain unchanged at companies that use a portion of their free cash flow (net profits plus noncash charges minus capital expenditures) to reduce the absolute share count.

If the enterprise value is unchanged and there are fewer shares outstanding, then the price of the remaining shares should go up by the amount of float shrink.

IBD: What have been the buyback trends this year and how do they compare with the year-ago period and other years?

Biderman: Newly announced buybacks the first half of this year were $354 billion (first quarter: $158 billion; second quarter: $196 billion). By contrast, in the first half of 2012 they totaled $221 billion (Q1 2012: $121 billion; Q2 2012: $100 billion).

Buybacks year to date were $423 billion compared with $429 billion announced over all of 2012. The sectors with the largest buybacks were technology, $104 billion, and consumer discretionary, $79 billion.

Materials and telecommunications had the smallest, $6 billion and $14 billion, respectively.

IBD: What has driven the increase in buybacks this year?

Biderman: Three reasons:

1. Rising cash positions on companies’ balance sheets and a slowly growing economy.

2. A zero-interest-rate environment where balance-sheet cash earns very little.

3. More companies have figured out that float shrink creates higher stock prices, more so than higher dividend payments.

IBD: What effect have rising interest rates had on buybacks?

Biderman: Low rates have supported debt-financed buybacks in the past few years and, with interest rates rising, such debt-financed buybacks likely will subside. Higher interest rates will also tend to reduce buybacks as higher rates generate more interest income from balance-sheet cash.