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Another Capex ETF Planned by Debutant Elkhorn Investments - ETF News And Commentary

Zacks Equity Research

The U.S. ETF industry has grown by leaps and bounds over the past few years and currently has more than 1,600 listed products with the total market cap just a tad below the $2 trillion threshold.

While there is no dearth of issuers, Elkhorn Investments has recently forayed into the ETF industry through its first filing. Elkhorn has filed for an ETF targeting companies that benefit from the U.S. capital expenditure plan (read: ETF Securities Launches Funds Based on Zacks Earnings Analysis).

Elkhorn S&P 500 Capital Expenditures Portfolio

As per the SEC filing, the proposed ETF looks to track the performance of the S&P 500 Capex Efficiency Index before fees and expenses. The index consists of 100 stocks chosen from the S&P 500 that have exhibited high capital expenditure efficiency. This is measured by the sales increase that came on the back of capital investments.

As such, companies eligible for inclusion “must have its most recent fiscal year capital expenditures scaled by sales lower than the historical three year average.” Stocks are then ranked based on the ratio of current year to three-year average, with 100 companies with the lowest ratios finally considered for inclusion in the index.Also, constituents within the index are equally weighted, which ensures portfolio diversification.

How Does it Fit in a Portfolio?

The proposed fund is a good option for investors seeking to invest in dynamic and growing companies. The fund is an intriguing choice for longer-term investors looking to invest in companies that have efficiently channeled capital back into their business in the form of capital expenditures.

Although dividends and share buybacks are the primary ways opted by companies to provide returns to shareholders, capital expenditures are also one avenue by which management can provide return of capital to investors.

A gradually improving U.S. economy, soaring consumer confidence and falling unemployment levels and record amount of cash on the balance sheet of companies might motivate them to boost capex for longer-term growth, rather than spending a higher proportion of cash on dividends and buybacks (read: Dividend Boom and Share Buybacks Put These ETFs in Focus).

ETF Competition

The proposed fund when launched might face competition from another recently filed fund by iShares. iShares U.S. Capex ETF also uses capex as the criteria for selecting companies in the fund though it has a slightly different approach (read: iShares Plans U.S. Capex ETF).

The fund looks to track the performance of the Morningstar U.S. CapEx Index, providing exposure to U.S. companies that are sensitive to increases in capital expenditure in the economic cycle. The index primarily includes large- and mid-cap companies from sectors such as basic materials, industrials and technology.

Apart from the recently filed product, there are no direct competitors for Elkhorn S&P 500 Capital Expenditures Portfolio. However, there are some more specialized funds which are focused on capex sensitive areas. These include First Trust ISE Global Engineering and Construction Index Fund (FLM) with a small asset base of $13 million and PowerShares Dynamic Building & Construction ETF (PKB) with an asset base of $51.3 million.

However, investors should note that FLM and PKB are not direct competitors for the newly filed product but might be near competitors if the Elkhorn fund does get approved.

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FT-ISE GLBL ENG (FLM): ETF Research Reports
 
PWRSH-DYN BLDG (PKB): ETF Research Reports
 
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