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According to an article on Fortune.com, corporate share purchases have long been one of the biggest sources of support for Wall Street and companies’ own earnings per share. However, they are waning as borrowing costs are rising and cash reserves are shrinking, per a Bloomberg article.
The S&P 500 constituents’ actual first-quarter buybacks were 21% below the year-ago levels, according to Goldman Sachs Group Inc. This suggests that a recession has already arrived. The upcoming quarters could witness fewer share-buying announcements, Goldman has said, forecasting buybacks this year at $808 billion versus $923 billion in 2022.
Why 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 some firms to continue with buybacks in order to boost EPS growth.
Against this backdrop, below, we highlight a few ETFs that could win/lose amid reduced buybacks.
ETFs to Win
Communication Services Select Sector SPDR ETF (XLC - Free Report)
The underlying Communication Services Select Sector Index seeks to provide an effective representation of the communication services sector of the S&P 500 Index. Communication Services is one of the S&P 500 sectors that is proactive in buybacks. The fund charges 10 bps in fees, as per an article published on Yardeni.com.
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. Information Technology is another S&P 500 sector that is also known for its share repurchase. The fund charges 10 bps in fees.
The underlying Health Care Select Sector Index includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology. Healthcare is also good on the buyback policy. The fund charges 10 bps in fees.
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. PKW charges 61 bps in fees.
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.The fund charges 5 bps in fees.
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ETFs to Win/Lose on Reduced Buybacks
According to an article on Fortune.com, corporate share purchases have long been one of the biggest sources of support for Wall Street and companies’ own earnings per share. However, they are waning as borrowing costs are rising and cash reserves are shrinking, per a Bloomberg article.
The S&P 500 constituents’ actual first-quarter buybacks were 21% below the year-ago levels, according to Goldman Sachs Group Inc. This suggests that a recession has already arrived. The upcoming quarters could witness fewer share-buying announcements, Goldman has said, forecasting buybacks this year at $808 billion versus $923 billion in 2022.
Why 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 some firms to continue with buybacks in order to boost EPS growth.
Against this backdrop, below, we highlight a few ETFs that could win/lose amid reduced buybacks.
ETFs to Win
Communication Services Select Sector SPDR ETF (XLC - Free Report)
The underlying Communication Services Select Sector Index seeks to provide an effective representation of the communication services sector of the S&P 500 Index. Communication Services is one of the S&P 500 sectors that is proactive in buybacks. The fund charges 10 bps in fees, as per an article published on Yardeni.com.
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. Information Technology is another S&P 500 sector that is also known for its share repurchase. The fund charges 10 bps in fees.
Health Care Select Sector SPDR ETF (XLV - Free Report)
The underlying Health Care Select Sector Index includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology. Healthcare is also good on the buyback policy. The fund charges 10 bps in fees.
ETFs to Lose
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. 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.The fund charges 5 bps in fees.