Market Overview

A Sector ETF For Share Buybacks

A Sector ETF For Share Buybacks

The Financial Select Sector SPDR (NYSE: XLF) is down 4.6 percent year-to-date, good for one of the worst showings among the sector SPDR exchange traded funds, but give XLF some credit. That ETF and rival bank-heavy funds have recently been rebounding.

Over the past month, XLF is up more than 8 percent. Last week, XLF gained nearly 2 percent even with the Federal Reserve opting to keep interest rates on hold while revealing two rate hikes are likely this year, down from the four increases many market participants were betting on entering 2016.

There is another catalyst with the potential to lift XLF and rival financial services ETFs: Increased share repurchase programs from some of the big-name firms found in these ETFs. For example, Bank of America Corp (NYSE: BAC) recently added $800 million to a $4 billion buyback plan unveiled last year while Dow component JPMorgan Chase & Co. (NYSE: JPM) said last week it can repurchase up to $1.8 billion of its own shares through June, adding to the $6.4 billion it got approval to buyback last year, according to Bloomberg.

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JPMorgan Chase and Bank of America are XLF's third- and fourth-largest holdings, respectively, combining for about 12.6 percent of the ETF's weight. Capital One Financial Corp. (NYSE: COF) added $300 million to its buyback efforts last month, according to Bloomberg. That stock commands a weight of 1.3 percent in XLF, the largest financial services ETF.

Large investment and money center banks still have some work to do on the buyback front, particularly because many of the recent repurchases are aimed at absorbing shares issued during the financial crisis or for the purposes of executive compensation.

Financial services is the third-largest sector weight in the PowerShares BuyBack Achievers Portfolio (NYSE: PKW) at about 17.7 percent, but many of the stocks from that sector in PKW's lineup are insurance providers, real estate firms and smaller banks. The NASDAQ US BuyBack Achievers Index, PKW's underlying index, only includes companies that reduced share counts by at least five percent over the trailing 12 months.

Increased buyback activity in the financial services sector comes as the group also takes aim at continuing to boost dividends.

“According to SNL Financial, 13 banks have increased common dividends declared by 4 percent or more for six consecutive calendar years. While the 2008 financial crisis is far in the rearview mirror, banks in general do not provide the dividend growth records that can be found in consumer staples or industrials,” said S&P Capital IQ in a recent research note.

Disclosure: The author owns shares of XLF.

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