ETFs
5 ETFs to play with booming company buyouts – May 9, 2024
American companies are showing their optimism about the American economy through a sharp increase in share buybacks. Over the past 13 weeks, companies have announced buybacks exceeding $383 billion, a 30% increase from the same period last year and the largest sum since June 2018. according to a study by Deutsche Bankas quoted on Yahoo Finance.
The trend has been bullish for some time now. Share repurchases totaled $219.1 billion in the fourth quarter of 2023, up 18.0% from third-quarter 2023 spending of $185.6 billion and up 3.7% from 211 .1 billion dollars from the fourth quarter of 2022. By Howard Silverblatt, Senior Index Analyst at S&P Dow Jones IndicesCompanies with strong cash flows have opted for aggressive buybacks, with the top 20 issuances accounting for more than 54.1% of buybacks in Q4 2023, higher than the historical average of 47.4%.
The trend of increased buybacks has not materialized in 2023, despite optimistic earnings, due to widespread projections of a recession. However, as the U.S. economy demonstrates resilience in 2024, companies are reaffirming this strong sentiment by increasing their buyback activities.
Broad participation beyond tech giants
Deutsche Bank’s equity strategy team said the buyback boom was outpacing tech giants like Apple and Alphabet, which recently unveiled a $70 billion buyback plan. Of the $262 billion in buybacks reported during the first-quarter earnings season, $82 billion came from companies outside the big tech sector. This broad participation is a strong sign of the good health of the stock market as a whole and of an imminent rally.
Below, we highlight a few ETFs that could benefit from this trend.
Focus on ETFs
Invesco BuyBack Achievers ETF (PKW – Free report)
At the beginning of March, Goldman Sachs strengthened its stock buyback forecast for S&P 500 companies, with buybacks likely to increase 13% to $925 billion in 2024, as reported in Business Today. The increase in redemption activity puts these ETFs purely in the spotlight.
The underlying NASDAQ US BuyBack Achievers Index includes US securities issued by companies that have experienced a net reduction in shares outstanding of 5% or more over the past 12 months. The fund charges 62 basis points in fees.
Sector SPDR ETF Selected for Technology (XLK – Free report)
Among the latest activities, Apple’s recent announcement of a $110 billion buyback plan constitutes the largest in history. In fact, technology companies made up a significant portion of the latest buyouts. This puts the focus on XLK, which weighs heavily on Apple.
Vanguard S&P 500 ETF (VOO – Free report)
Buybacks are normally seen as an indicator of companies’ confidence in their health and macroeconomic environment. A growing trend in buybacks means higher earnings potential and management’s confidence in its cash flow generation. The trend also indicates that the stock valuation is not exorbitant at the current level. So, as S&P 500 buybacks become strong, one can bet on S&P 500 companies with the VOO fund.
WisdomTree US Large Cap ETF (PES – Free report)
Repurchase activity reduces the number of shares outstanding and increases earnings per share. The EPS fund could therefore be a good choice in this context.
The fund’s underlying WisdomTree US LargeCap Index is a fundamentally weighted index that measures the performance of profit-generating companies within the large-cap segment of the US stock market.
Pacer US Cash Cows 100 ETF (COWZ – Free report)
The Yahoo Finance article noted that Elyse Ausenbaugh, global investment strategist at JPMorgan Private Bank, sees buybacks as part of a broader trend where companies are experiencing higher cash flows and deploying them in ways that increase shareholder value. This means that buybacks are an indication of companies’ strong/decent cash balances. This highlights the cash cows.
The fund’s underlying Pacer US Cash Cows 100 Index uses an objective, rules-based methodology to provide exposure to large- and mid-cap U.S. companies with high free cash flow yields.
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