Technology sector exchange traded fund investors will want to monitor Capitol Hill as Congress scrutinizes tax reforms that includes changes to the government’s repatriation policy.
“Investors are likely to know by the end of June whether comprehensive tax reform with repatriation will be approved by Congress by the end of 2015 or early 2016,” according to Evercore ISI analysts. “We continue to think repatriation will be an important part of a comprehensive tax reform bill, and something that both parties want to accomplish, even though specific details are lacking. Estimates vary, but many think U.S. corporations hold roughly $2 trillion overseas.”
The analysts argue that software companies could potential repatriate billions of dollars in cash in 2016 if the repatriation bill passes.
Companies like Microsoft (NasdaqGS: MSFT), Oracle (NasadqGS:ORCL) and other large multi-nationals could utilize the cash influx to augment their respective buyback plans. Additionally, the analysts also believe the cash infusion could allow tech companies to aggressively acquire other firms to build a larger foothold in faster growing segments of the software market, including industries involved with cloud apps, analytics, digital marketing and large data technologies.
If the repatriation bill passes and companies go ahead with additional share repurchases, investors may take a look at broad large-cap tech ETFs, such as the Technology Select Sector SPDR (NYSEArca: XLK), to gain exposure to large multi-nationals. XLK top components include Apple (NasdaqGS: AAPL), Microsoft, Verizon Communications (NYSE: VZ) 4.9%, AT&T (NYSE: T) 4.3% and Facebook (NasdaqGS: FB) 4.1%.
On the other hand, if companies were to utilize their flush war chests to acquire software companies, as the Evercore ISI analysts suggest, investors may potentially capture the upside of the greater M&A activity through broad software sector ETFs, including the iShares North American Tech-Software ETF (NYSEArca: IGV), SPDR S&P Software & Services ETF (NYSEArca: XSW) and PowerShares Dynamic Software Portfolio (NYSEArca: PSJ).
The software ETFs lean toward smaller potential takeover targets. For instance, IGV includes 10.4% small-caps and 39.6% mid-caps. XSW includes 21.9% micro-caps, 33.4% small-caps and 30.7% mid-caps. PSJ holds 11.1% micro-caps, 30.1% small-caps and 34.0% mid-caps.
A repatriation bill would most likely either included a new adjusted low tax rate on foreign revenue earned by a U.S. corporation or even a one time tax break. U.S. companies with foreign revenue streams are typically taxed in the local host country and then again once the money is brought back into the U.S. The companies won’t have to experience a double taxation since a foreign tax credit is provided, but firms can opt to defer repatriation, which has caused many multi-nationals to sit on billions of dollars in overseas accounts.
For more information on the tech space, visit our technology category.
Max Chen contributed to this article.