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Will Buyback ETFs Gain Big on Overseas Cash Repatriation?

Zacks Equity Research

The performance of Buyback ETFs has been lackluster in 2016 owing to subdued buyback activity in the year. As per a TrimTabs report, stock buyback announcements fell to a nine-quarter low of $115 billion in the third quarter of 2016 and the figure  would have been much lower excluding Microsoft’s $40 billion buyback (read: Buyback ETFs: Trump Beneficiary or Overhyped Bets?).

However, with Donald Trump winning the U.S. elections, a plethora of buybacks are expected to hit the market. This is driving the buyback ETFs higher. PowerShares Buyback Achievers Portfolio PKW is the most popular fund in the space, managing an asset base of $1.4 billion. PKW tracks the NASDAQ US Buyback Achievers Index, which comprises companies that have repurchased 5% or more of their common stock in the trailing 12 months. Another fund SPDR S&P 500 Buyback ETF SPYB with an AUM of $8 million measures the performance of the top 100 stocks with the highest buyback ratios in the S&P 500 in the last 12 months. Both the funds are up about 10% post Trump’s win (as of December 13, 2016).

AdvisorShares Wilshire Buyback ETF TTFS that looks to generate long-term capital appreciation with an asset base of $148.5 million is up more than 12% in the above mentioned time period (see all total Market U.S. ETFs here).

Why the Surge?

In his campaign the President-elect called for a repatriation holiday of 10%. In fact reducing corporate taxes has been an integral part of his agenda. If such a move materializes, U.S.-based companies will not feel uncomfortable in repatriating back their income earned from and kept in the foreign country. At present, overseas cash can't be brought back to the country without getting hit by a 35% corporate tax rate.

It is believed that U.S. companies are hoarding $2.6 trillion in cash overseas equivalent to almost 14% of the total U.S. gross domestic product. Technology and pharma are sectors with the highest amount of cash overseas as per a CNBC report. The report states that while Microsoft Corporation MSFT and General Electric Company GE have more than $100 billion each, Apple Inc. AAPL holds $91.5 billion. Pharma major Pfizer Inc. PFE has close to $80 billion (read: What Tech Crash? These ETFs are Still Top Picks).

With the repatriation of funds, these companies could spend on dividends, share repurchases, M&A, capital expenditures and repay debt. As per Goldman, the total value of cash spent on buybacks is expected to peak in 2017 and increase approximately 30% year over year to $780 billion.

In a nutshell, the outlook for Buyback ETFs appears impressive owing to Trump’s policies, making it an intriguing option for investors. However, it is to be noted that with the Fed expected to hike rates shortly and debt becoming expensive the focus could be on repaying debt. Additionally, U.S. companies are already sitting on $1.94 trillion in cash domestically, the highest in two years, according to the latest Federal Reserve data. Thus, repatriation holiday in Trump’s reign might not prove to be attractive for these companies (read: Face-Off: Dividend Growth & Buyback ETF).

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