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Time to Tap Buyback ETFs?

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In the fourth quarter, S&P 500 companies shelled out about $189 billion on stock buybacks, up 2% from the third quarter and down 18.2% from a year earlier, according to preliminary data from S&P Dow Jones Indices, a unit of ratings firm S&P Global Inc, as quoted on Wall Street Journal.

Companies on the index would have paid a total of $2 billion in taxes for the quarter and lost about 0.48% in operating income had the levy been in effect in the fourth quarter, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

And despite the 1% levy on stock buyback, buybacks by companies on the S&P 500 are projected to cross $1 trillion in 2023 for the first time in a calendar year, according to S&P Dow Jones Indices. The 1% tax went into effect on Jan 1, 2023.

As of Feb 17, 2023, buybacks totaled more than $220 billion, a record for that point in the year, according to a Goldman Sachs analysis of S&P 500 and Russell 3000 companies.

How Buyback Could Be a Winning Strategy?

A stock repurchase, or buyback, generally happens if a company has enough cash on hand to buy some of its own shares back from the open market. This shows management’s faith in the company’s potential and stability. This also indicates that its shares are undervalued.

Buybacks tend to increase share prices in the short term, as the buying lowers the supply of outstanding shares. Buybacks don’t cause additional tax payments for taxable investors until they sell shares and realize capital gains, unlike dividend payouts, which are taxed as income.

However, there are companies that repurchase stocks only for the sake of inflating share price. As profit margins are under pressure due to rising rates and high inflation, some investors expect firms to continue with buybacks in order to boost EPS growth.

Most recently, market veteran and billionaire investor Warren Buffett said critics of stock buybacks are “either an economic illiterate or a silver-tongued demagogue” or both, and all investors benefit from share repurchase as long as the action is executed at the right prices.

Which Companies Bought Back the Most?

Among the biggest share repurchase announcements are Chevron Corp.’s $75 billion buyback program, the $40 billion plan of Meta and Goldman Sachs Group Inc.’s $30 billion authorization, per Wall Street Journal.

Megacap technology companies were among those spending the most on share repurchases in fourth-quarter 2022. Apple shelled out about $19.5 billion on stock repurchases, Meta Platforms repurchased about $6.9 billion of its shares, and Microsoft Corp. bought back about $5.5 billion of its stock.

Based on fourth-quarter results from about 90% of the companies on the S&P 500, share buyback from reporting corporations have declined about 18% year over year to $189 billion, according to S&P Dow Jones Indices data, as quoted on Wall Street Journal.

ETFs in Focus

Against this backdrop, investors can keep an eye on the following buyback ETFs.

Invesco BuyBack Achievers ETF (PKW - Free Report)

The underlying NASDAQ US BuyBack Achievers Index comprises U.S. securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. Consumer Discretionary (22.74%), Financials (20.66%) and Healthcare (14.83%) are the top three sectors of the fund. PKW charges 61 bps in fees.

iShares Core Dividend ETF (DIVB - Free Report)

The underlying Morningstar US Dividend and Buyback Index is composed of U.S. stocks with a history of dividend payments and share buybacks. Both dividends and stock buybacks are proven drivers of long-term stock returns. Financials (19.6%), Information Technology (19.2%) and Industrials (10.16%) are the top three sectors of the fund. The fund charges 5 bps in fees.

Technology Select Sector SPDR ETF (XLK - Free Report)

The underlying Technology Select Sector Index includes companies from the following industries: computers & peripherals; software; diversified telecommunication services; communications equipment; semiconductor & semiconductor equipment; internet software & services; IT services; wireless telecommunication services; electronic equipment & instruments; and office electronics. The Zacks Rank #2 (Buy) fund charges 10 bps in fees.


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