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ETFs to Ride on Share Buyback Craze

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Stock buybacks for the S&P 500 companies in the fourth quarter of 2018 set a record for the fourth consecutive quarter and was the longest such streak in the last two decades. Per the S&P Dow Jones Indices data, share repurchases increased 62.8% year over year to $137 billion in the last quarter and 9.4% higher than the previous record of $203.8 billion set in the third quarter.

For 2018, the S&P 500 companies returned more than $1.2 trillion to investors, buying back a record $806.4 billion (up 55.3% from 2017) in shares thanks in part to a corporate tax bonanza. Notably, the new tax law encouraged the companies to bring back cash at significantly reduced rates and distribute part of it to shareholders in the form of share buybacks and dividends. In addition to tax savings, stronger earnings also provided a boost to the share buyback program (read: Buybacks on a Tear Despite Political Attack: ETFs in Focus).

The technology sector, accounting for nearly one-third of total buybacks, led the pack last year repurchasing $278.5 billion shares. The tech giant Apple (AAPL - Free Report) was the biggest buyer, snapping up $74.2 billion in 2018, followed by Oracle (ORCL - Free Report) and Microsoft (MSFT - Free Report) , which bought back $29.3 billion and 416.3 billion shares, respectively.

Financials and healthcare are the next top sectors with share repurchases of $150 billion and $108.7 billion, respectively. Wells Fargo (WFC - Free Report) is the top buyer in the financial sector at $21 billion while Merck (MRK - Free Report) is the biggest player in the healthcare at $9.1 billion.

That said, investors seeking to ride the share buyback boom should bet on any of these three ETFs:

Invesco BuyBack Achievers ETF (PKW - Free Report)     

This ETF tracks the NASDAQ US Buyback Achievers Index, which comprises companies that have reduced shares outstanding by 5% or more in the trailing 12 months. It holds 173 stocks in its basket and charges a higher annual fee of 63 bps. Here, information technology is the top sector with 27.3% share, followed by consumer discretionary (19.1%), financials (16.9%) and industrials (13.2%). PKW is the most popular fund in the buyback space, managing an asset base of nearly $1.4 billion and trading in an average daily volume of 235,000 shares (read: ETF Trends Seen in the 10-Year Old Bull Market).

SPDR S&P 500 Buyback ETF (SPYB - Free Report)

This fund focuses on the top 100 companies in the S&P 500 and has the highest buyback ratio in the last 12 months. It follows the S&P 500 Buyback Index, charging investors 35 bps in annual fees. From a sector look, financials take the largest share with one-fourth allocation while information technology, consumer discretionary and industrials round off the next spots. The product has a lower AUM of $22.1 million and trades in a paltry volume of around 6,000 shares a day on average.
 
iShares U.S. Dividend and Buyback ETF (DIVB - Free Report)

This fund offers exposure to a broad basket of 350 U.S. companies that return capital to shareholders by paying dividends or buying back their stock. It is slightly tilted toward information technology at 23.5% while financials and health care round off the next two spots with double-digit exposure each. The ETF has accumulated $6.6 million in its asset base and trades in a paltry volume of around 5,000 shares a day on average. It charges 25 bps in annual fees (read: 10-Year Bull Market to Rage Ahead in 2019: 10 ETF Bets).

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