4 ETF Plays as Buybacks Bounce Back & Likely to Soar Higher

Share repurchases is a means for companies to maximize shareholder value and boost their own shares. It has been one of the most popular tools for keeping Wall Street charged-up in the past few years. But buybacks were under pressure in the coronavirus-rattled economy.

The virus outbreak and the resultant lockdowns in several countries had wreaked havoc on economies and businesses, causing a severe cash crunch. This had led the S&P 500 companies to suspend $190 billion in repurchases in late-March 2020.

In the second quarter of 2020 (the peak of the lockdown period), share repurchases totaled $88.7 billion — the lowest since March 2012 and a 55.4% drop-off from the first quarter of 2020 and 46.4% decline from the second quarter of 2019. For full-year 2020, buybacks were down 28.7% from 2019 and35.6% less than the record $806.4 billion in 2018.

Buybacks Rising in 2021: Q2 at About Record High

The trend has been improving faster for the better. S&P 500 quarterly buybacks are on their toward $200 billion and are now 11% behind from their all-time high of $223 billion set in Q4 2018. The Q2 of 2021 share repurchases were $198.8 billion, rising 11.6% from Q1 2021’s $178.1 billion of outlays, and up 124.3% from Q2 2020’s recent low of $88.7 billion, per an article published on spglobal.com.

About 294 companies reported buybacks of at least $5 million for the quarter, down from 335 in Q1 2021, and up from 170 in Q2 of 2020. Top 20 issues made up about 55.7% of Q2 2021 buybacks, up from Q1 2021’s 53.3% and up from the pre-COVID historical average of 44.5%.

More Buybacks Ahead?

“Given strong earnings and cash-flow, high expenditures [on buybacks] are expected to continue, with upward EPS impact increasing,” said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, as quoted on the source.

Moreover, with Democrats planning a 2% tax rate on the money companies are deploying to buy back stocks, one can expect a sharp rise in share repurchases near year-end. As programs are being discussed this month, and materialize in October, year-end may see a shoot-up in buybacks, per Howard Silverblatt.

Subdued stock prices at the current level may also encourage companies to buy back their own shares. “Given the current trend, 2021 should easily surpass 2019’s pre-COVID mark of $729 billion, opined Silverblatt.

Against this backdrop, below we highlight a few ETFs that could be in favor in the coming days.

ETFs in Focus

Invesco Buyback Achievers Portfolio PKW  

The underlying NASDAQ US BuyBack Achievers Index comprises of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. The fund charges 62 bps in fees.

Financial Select Sector SPDR Fund XLF

Buybacks in the financial sector have been improving. Financial buybacks rose 18.1%, spending $41.8 billion in Q2 2021 making up 21.0% of all buybacks, up from the Q1 2021 $35.4 billion, which accounted for 19.9% of the buybacks. Financial sector buybacks were 401% higher than the Q2 2020 $8.3 billion outlay, when the Fed restricted buybacks.

Communication Services Select Sector SPDR ETF XLC

Communication Services boosted buyback expenditures 25.2% to $27.3 billion, from the prior quarter’s $21.8 billion and tad below Q2 2020’s $27.6 billion. As a percentage of all buybacks, the sector was responsible for 13.7% of all buybacks from the prior 12.2%. The 12-month period was $82.9 billion, up from the prior 12-month expenditure of $72.3 billion.

Technology Select Sector SPDR Fund XLK

Information Technology buybacks have slowed a bit, though it is still leading on a nominal basis. In Q2 2021, IT’s share was flat at 31.6% of all S&P 500 buybacks compared to Q1 2021, and was down from Q2 2020’s 41.6%, as expenditures rose (11.4%) to $62.8 billion from the prior quarter’s $56.4 billion and was 70.1% higher than the Q2 2020 shell-out of $36.9 billion.

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Financial Select Sector SPDR ETF (XLF): ETF Research Reports
 
Technology Select Sector SPDR ETF (XLK): ETF Research Reports
 
Invesco BuyBack Achievers ETF (PKW): ETF Research Reports
 
Communication Services Select Sector SPDR ETF (XLC): ETF Research Reports
 
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