The Pros and Cons of Buying Buyback ETFs

Companies splurged on share buybacks in 2014’s first quarter, and investors splurged on buyback funds.

The amount companies spent buying back their own shares jumped 59 percent compared to a year ago, according to Standard & Poor’s. Over that time, exchange-traded funds focused on buybacks saw assets quadruple to $3.3 billion. Despite the jump, buyback ETFs largely live in the shadows of dividend-focused ETFs, which have about $60 billion in assets. While the buyback trend may slow, companies that do buybacks tend to be solid, profitable companies, and thus good investments.

Both dividends and share buybacks allow a company to pass on earnings to shareholders. Buybacks typically bump up the stock price, and do so without tax consequences for stockholders — unless they sell and must pay more in short-term capital gains. Dividend payments are taxed as ordinary income in the year they’re received.

Read More At Bloomberg.