Thanks to the Federal Reserve’s low interest rate policy, dividends and share buybacks have been all the rage in the recent years.
For instance, according to Birinyi Associates, large companies executed a record $141 billion in buybacks in April, the highest monthly amount ever, reports Anora Mahmudova for MarketWatch. In 2014, U.S. companies spent $679.5 billion on buybacks. Between 2009 and 2014, companies implemented $2.1 trillion in buybacks. [Buyback ETFs: Companies Fueling Their Own Stock Growth]
After shareholder returns rose over $903 billion in 2014, S&P Dow Jones Indices projects buybacks to rise at a “double-digit” rate this year and dividends to average another 14% annually, Financial Times reports. Many strategists forecast dividend returns to be above $400 billion for the year. Meanwhile, Goldman Sachs anticipates buybacks to reach $604 billion. [Embracing Buyback ETFs]
Buybacks and dividends are nice and, more importantly, useful. Long-term returns prove as much, but investors should also be looking for those companies that are diligently reinvesting in their businesses to increase market share and competitive moat. The Elkhorn S&P 500 Capital Expenditures Portfolio (NasdaqGM: CAPX), the first ETF courtesy of Elkhorn Investments, helps investors with that objective.
CAPX tracks the S&P 500 Capex Efficiency Index, which culls 100 S&P 500 members based on capital expenditure efficiency.
“Efficiency of capital expenditures is measured through capital expenditures that have resulted in increased sales. Capital expenditures, which are a form of investment, are one of the ways in which a company’s management can provide return on capital to investors,” according to S&P Dow Jones Indices. “In order to qualify for inclusion, a company’s most recent year of capital expenditures scaled by sales must be lower than its historical three-year average.”
The idea behind CAPX is one that BlackRock CEO Larry Fink is likely to approve of. In a letter to S&P 500 CEOs and CEOs of major ex-U.S. developed market companies last month, Fink warned about the effects of appeasing short-term demand for buybacks and dividends over the long-term rewards of reinvesting in a company’s business.
As of April 30, the largest sector weights in the S&P 500 Capex Efficiency Index included technology at 21.1%, financial services at 18.9% and consumer discretionary at 13.6%. Said another way, Elkhorn’s CAPX gives investors exposure to sectors that are home to companies that voraciously reinvest in building their businesses, but also sectors that do not skimp on dividends and buybacks.
Consumer discretionary and technology are usually the largest sector weights in buyback ETFs while technology and financial services have been among the biggest contributors of S&P 500 dividend growth in recent years. [Inside Another Buyback ETF]
CAPX equal weights its holdings. Top 10 holdings in the new ETF’s underlying index include Newmont Mining (NYSE: NEM), Range Resources (NYSE: RRC), Schlumberger (NYSE: SLB) and Dow component Caterpillar. The new ETF charges just 0.29%, which is low among this type of smart beta product.