Buyback Regains Favor After 2020 Gloom: ETFs to Buy
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 Have Been Rising in 2021
The trend has been improving faster for the better. Buybacks are expected to rise significantly in 2021, as big banks, thanks to the Fed approval, will now access the buyback market and “more companies continue to look to negate stock options.”
Of the 70 S&P 500 companies that shared information about buybacks through April 22, 50 repurchased shares. Share buybacks surpassed $200 billion April, marking the second-highest monthly tally since Trump’s tax cuts, per a MarketWatch article.
Buyback announcements from the tech sector was rife last week. Apple’s board has authorized a rise of $90 billion in its existing share repurchase program and Google's parent company Alphabet’s GOOGL board okayed the repurchase of up to an additional $50 billion of its own stock.
Net equity supply will be negative through 2021, despite the recent rise in IPOs and share offerings. Companies in the United States have been issuing new shares at an annualized pace of $660 billion through April, while S&P companies have announced $860 billion worth of annualized buybacks. Such corporate actions will boost the overall markets in the coming days, per market watchers.
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.
Technology Select Sector SPDR Fund XLK
Information Technology is still a dominant sector in buybacks, even as their share fell to 42.9% of all the S&P 500 buybacks in Q4 of 2020 from Q3 of 2020's 48.9%. On recent earnings calls, big tech names announced buybacks too. Apple AAPL again set an example for buybacks, spending $27.6 billion in Q4 of 2020, a record for a company in the S&P 500 history. Microsoft MSFT spent $6.5 billion in Q4 of 2020.
Financial Select Sector SPDR Fund XLF
Buybacks in the financial sector, which had slightly been lagging Information Technology in the pre-COVID period, increased to $13.6 billion in Q4, or 10.4% of the buybacks, from $12.1 billion in Q3 of 2020. For 2021, big banks are expected to boost their buyback expenditures (read: Banking Earnings Upbeat: Time to Buy Financial ETFs on Value?).
Apart from big banks, Warren Buffett's Berkshire Hathaway BRK.B has about 13% weight in the fund XLF. Berkshire Hathaway, shelled out about $9.0 billion on buybacks in Q4 of 2020, same as that of Q3. For full-year 2020, the company spent about $24.7 billion for the year 2020 compared to $4.9 billion in 2019. No wonder, things will be rosier in 2021. And Buffett’s company spent more than $1.3 billion into share buybacks in April.
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