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Will Trump's Tax Plan Boost or Bust Buyback ETFs?

Sanghamitra Saha

The performance of buyback ETFs has been moderate in the last one year owing to subdued buyback activity. As per an article published on CNBC, buyback fell 11% in 2016 and is down 20% so far this year from the year-ago level, as indicated by Goldman Sachs. Stock repurchase has been the slowest in five years.

As per an article published on Bloomberg on May 3, S&P Global Indexes reports that the third of companies in the S&P 500 that have come up with results so far recorded a 23% decline in spending on buybacks in the first quarter from a year ago. Bank of America now expects buyback activity to slip to even 30% (read: Top ETF Stories of April 2017).

What’s Behind the Slowdown

CNBC went on to point out that investors chose dividends over buybacks as a way to return shareholders’ wealth of late. 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.

In the last five-year period, buybacks totaled $2.4 trillion while $1.7 trillion was spent on dividends, as per the CNBC article. "Infatuation with buybacks has ended for both companies and investors," David Kostin, Goldman's chief U.S. equity strategist, said in a note to clients.

As per sources, the stock market’s stupendous ascent this year (in fact since Trump’s win in the November election) is weighing on activity. 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.

Can Anything Charge Up Buyback?

As promised, President Trump’s administration announced a tax plan in late April that mainly revolved around cutting corporate taxes and adjusting personal tax rates. Though most market participants are not sure if Congress will pass any of these tax proposals, the Trump administration seems confident about the materialization of the tax plan.

In the face of lower corporate taxes stipulated by the Trump administration, companies’ profitability would be enhanced. This higher profitability may push companies to enhance shareholders’ wealth. Trump also plans to propose a tax on over $2.6 trillion in offshore earnings (read: 5 ETFs to Buy if Trump Tax Reform is Enacted by Year End).

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?).

Does Everything Depend on Trump & Fed?

Investors should also note that the S&P 500 is hovering around an all-time high and a loose fiscal policy (if at all it materializes) may spur further stock rally. Plus, the Fed is also on its way to tighten monetary policies. If the economy gains 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.

Now it remains to be seen what decides the path of buyback ETFs – Trump’s proposed tax plan (if it materializes) benefitting the activity or Trump rally hurting 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 ETF SPYB measures the performance of the top 100 stocks with the highest buyback ratios 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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