As activist shareholders increasingly turn up the heat on companies to use their cash to return value to shareholders via share buybacks and/or increased dividends, some investors counter that the money would be better spent if corporations reinvested it back into their businesses to create long-term growth.
The Elkhorn S&P 500 Capital Expenditures ETF (CAPX), which began trading yesterday on the Nasdaq Stock Market, speaks to the latter notion by tracking the S&P 500 Capex Efficiency Index comprised of the 100 companies within the S&P 500 Index that, as the name implies, have been the most efficient in converting their capex spending into rising sales.
Standard & Poor’s measures efficient capex as the maximization of sales generated per dollar of capital expenditures, and its research finds that capex-efficient companies have historically outperformed the broader market.
According to S&P Dow Jones Indices, the S&P 500 Capex Efficiency Index posted 10-year annualized total returns of 10.95 percent through April 30, versus 8.32 percent for its benchmark S&P 500.
But that outperformance comes with a catch in that the capex index posted a 10-year annualized standard deviation of 18.69 percent versus 14.74 percent for the S&P 500.
“It's a growth fund, so your beta will be a little higher,” says Ben Fulton, founder and CEO Elkhorn Investments LLC, the Wheaton, Ill.-based investment firm that’s sponsoring the new ETF.
Elkhorn is new to the ETF game, but Fulton isn’t. Before he started Elkhorn two years ago, Fulton spent nine years at Invesco PowerShares, including his last three years there as managing director of global ETFs. He participated in the creation of several PowerShares ETFs based on S&P indexes that apply different factors such as low volatility, high beta and quality to measure subsets of the S&P 500 Index.
Fulton also had a hand in creating PowerShares ETFs based on companies that scored high in share buybacks and consistent dividend growth, both of which seem to be on the other side of the philosophical divide from the CAPX fund regarding how corporations should spend cash on their balance sheets.
Not so, says Fulton, who posits the CAPX fund could work well in tandem with those types of funds that put a different twist on the S&P 500. For example, he believes the higher-beta CAPX fund complements the PowerShares S&P 500 Low Volatility Portfolio (SPLV) fund consisting of the 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months. “If you barbell [those two funds], now you have two proven strategies that have demonstrated a tendency to outperform the base index," he explains. "There’s very little overlap, but you’re getting both components.”
In that vein, he adds the CAPX fund could also be a good pairs trade with value-tilted models focused on dividends or buybacks because there’s little overlap between them.
One of the things Fulton likes about the capex-efficiency index is its tendency to outperform its benchmark during rising interest rate environments. “We’re very encouraged about that since most people are looking for rising rates at some point in the future,” he says.
The Elkhorn S&P 500 Capital Expenditures ETF is equal-weighted and rebalanced quarterly, and carries an expense ratio of 0.29 percent. Information technology (21 percent) and financials (19%) are the top two sectors, followed by consumer discretionary (13 percent), and industrials and health care (both more than 11 percent).
The top five holdings are Pall Corp. Newmont Mining Corp., Juniper Networks Inc., Altera Corp. and Lam Research Corp.