Warning Signs For Buyback ETFs?

Buyback activity has a subdued start to 2017. The S&P 500 companies’ stock buyback fell 17.5% year over year and 1.6% sequentially to $133.1 billion in the first quarter of 2017.

Superb market rally on Trump-induced optimism is believed to have held companies back from indulging in share repurchase. It means that this monster rally is causing overvaluation in the market, which in turn is limiting corporates’ intention to buy back their own stocks at inflated prices.

After all, U.S. stocks witnessed the strongest first half of a year since 2013 on expectations that the Trump administration will deliver on pro-growth policies. While the Dow and S&P 500 gave their best first-half performances in four years, the Nasdaq Composite Index had it since 2009.

The S&P Dow Jones Indices also noted that 255 S&P 500 issues lowered their share count for Q1 of 2017, from 281 for Q4 2016 and 324 for Q1 2016. Around 71 companies reduced their share count by 4% year over year in Q1 of 2017 against 93 in Q4 of 2016 and 139 in Q1 of 2016.

Can Buyback Surge Ahead?

As per the S&P Dow Jones Indices analyst, the trend looks even worse for Q2 of 2017. In May, CNBC pointed out that investors have lately chosen dividends over buybacks as a way to return shareholders’ wealth. This is a completely different scenario that we noticed in the 8-year-old bull market. In previous years, buybacks overpowered companies and investors’ sentiments than dividends.

The Fed is also on its way to tighten monetary policies. If the economy gains further momentum, and the Fed acts faster, interest rates are expected to rise faster. So, accessing the debt market to finance buybacks would not be an easy task going forward.

Then again, President Trump’s administration announced a tax plan in late April revolving mainly around cutting corporate taxes and adjusting personal tax rates. Though political uncertainty is rife related to the implementation of such measures, parts of Trump’s policies like the travel ban have lately been out into effect. This is likely to boost investors’ confidence in Trump’s tax cut proposals.

At present, overseas cash can't be brought back to the country without getting hit by a 35% corporate tax rate. Now, overall tax cuts and a one-time repatriation tax could boost share repurchases (read: Buyback ETFs: Trump Beneficiary or Overhyped Bets?).

U.S. companies are sitting on huge cash balances leaving companies at ease with their ability to buy back their shares. Citi strategists believe that “the US has become a capital-lite and distribution-heavy stock market” and estimates buybacks and dividends to be $895.6 billion this year, slightly lower than $957.9 billion projected for investments.

Now, it remains to be seen whether Trump’s proposed tax plan (if it materializes) benefits ETF activity or if a Trump rally hurts the same.

ETFs in Focus

Whatever the case, investors can keep a tab on the following buyback ETFs.

PowerShares Buyback Achievers Portfolio PKW looks to track companies that have implemented a net reduction of 5% or more in shares outstanding in the last 12 months (see Total Market (U.S.) ETFs here).

Another buyback ETF SPDR S&P 500 Buyback (NYSE:SPYB) ETF SPYB measures the performance of the top 100 stocks with the highest buyback ratio in the S&P 500 in the last 12 months.

AdvisorShares Wilshire Buyback ETF TTFS looks to generate long-term capital appreciation.

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