Corporate America’s capital expenditures remains low as many companies opt for buyback and dividend plans. Nevertheless, this could leave a relatively new capex exchange traded fund more room to rise once firms begin to expand operations.
Investors can take a look at the recently launched Elkhorn S&P 500 Capital Expenditures Portfolio (NasdaqGM: CAPX) targets those companies that are diligently reinvesting in their businesses to increase market share and competitive moat. Specifically, CAPX takes the top 100 S&P 500 companies based on efficient capital expenditure as a way to track U.S. firms that have reinvested their money toward meaningful growth and innovation. [An ETF That Larry Fink Would Love]
Business capital spending is an important indication of how confident Corporate America is in the future, according to Morningstar‘s director of economic analysis, Bob Johnson.
“They won’t be buying big equipment if they feel the economy is going to be in weak condition. So, it’s a great forward indicator,” Johnson said.
Equipment and technology also help the labor force do more or generate greater productivity. The better the equipment, the more people will be able to produce. For instance, a farmer planting and sowing with his or her bare hands will not be able to do as much compared to someone with tractors on hand.
“So, capital spending is really important,” Johnson added. “It’s really only the second other factor that’s out there besides labor-force growth that moves GDP forward. So, it’s very important that businesses keep investing for the future.”
However, current contribution to the GDP from capital expenditures remain near historic lows, hovering around 0.2%, compared to the high of over 0.6% in 2000, according to Morningstar data.
“Equipment spending as a percentage of GDP is at near-record low levels,” Johnson said. “Instead, corporations are spending more of their money on stock buybacks and mergers and acquisitions at the moment. Unfortunately, this is slowing down productivity growth and the long-term potential growth of the U.S. economy.”
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, calculated that companies in the S&P 500 have bought back $148 billion of their own shares in the first quarter this year, compared to $132.6 billion in the first quarter of 2014. According to Goldman Sachs Group, Corporate America is not the best investor of its own company stocks. [Buyback ETF Theme May Forgo Long-Term Growth for Short-Term Gains]
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Max Chen contributed to this article.