If Congress passes meaningful tax reform in the year ahead, a key provision would likely focus on sharply lowered tax rates on repatriated foreign-earned cash. And that may help one group of ETFs in particular: those that focus on buybacks.

Last November, strategists at Goldman Sachs predicted that a move to sharply lower the tax rate on repatriated profits would leave firms with so much excess cash that they would step on the gas on many fronts. For example, these strategists predicted that 52 percent of that $2.6 trillion offshore stash of cash would go towards R&D and acquisitions. Another sizable chunk would go towards higher dividends and debt reduction.

The remaining $780 billion would go towards share buybacks. “A significant portion of returning funds will be directed to buybacks based on the pattern of the tax holiday in 2004,” the Goldman strategists predicted. (That 2004 tax holiday temporarily lowered the foreign cash tax rate from 35 percent to just 5 percent.)

Share buybacks were greatly in vogue coming out of the last recession, helping the PowerShares BuyBack Achievers Portfolio (PKW) to handily outperform the S&P for four straight years ending in 2011. That strong run helped this ETF beat the S&P 500 by an average of 2 percentage points annually over the past 10 years.

Still Waiting

Of course, Washington’s agenda has thus far been delayed, which may explain why share buyback activity is 20 percent lower thus far in 2017, compared to the same period in 2016, according to Societe General. And that may be creating a drag on the performance of buyback ETFs. The PowerShares fund, which has a 0.63 percent expense ratio, trails the S&P 500 on a year-to-date, one-year and three-year basis. “Buybacks are kind of a backdoor value play, and value has lagged growth in the market recently,” says Nick Kalivas, senior equity strategist at Invesco PowerShares.

Still, that value angle is a reason why some find buybacks appealing. “Management, through their actions,” are saying that their stocks are inexpensive. Indeed, the average holding in the PowerShares ETF trades for 16 times forward earnings and 1.34 times trailing sales, according to Morningstar. That compares to 21 times forward earnings and 2.06 times trailing sales for the S&P 500.

The PowerShares fund tracks an underlying index of companies that have reduced shares outstanding by at least 5 percent over the prior 12 months. That’s the same methodology deployed by the PowerShares International BuyBack Achievers ETF (IPKW), which has recently fared far better than its domestic counterpart. It has risen an average of 11 percent a year over the past three years, far better than the MSCI AWCI ex U.S.A index’s two percent yearly gain in that time.

Fully half of this fund’s assets are invested in Japanese and Canadian firms, reflecting the fact that share buybacks are still fairly uncommon in most other nations. But that’s starting to change. “In recent years, Japanese firms, for example, have been pushed to deliver greater shareholders returns (like buybacks),” says PowerShares’ Kalivas.

Investors focused more squarely on domestic firms that are buying back shares have several other ETFs to choose from. The SPDR S&P 500 Buyback ETF (SPYB), for example, carries a more reasonable 0.35 percent expense ratio. Trouble is, that fund has just $8 million in assets. And “State Street (the fund’s sponsor) hasn’t hesitated to close such small funds in the past, says Elisabeth Kashner, director of ETF research at FactSet.

Despite a category high 0.90 percent expense ratio, the AdvisorShares Wilshire Buyback ETF (TTFS) merits a close look, as it addresses a key drawback of share buyback plans: debt leverage. Many firms borrow money to buy back shares, which can prove to be quite risky during economic downturns.

The AdvisorShares fund, which has $131 million in assets, will only buy shares of firms that aren’t raising debt levels in order to buy back shares. That may explain this fund’s relatively strong performance, outgunning the S&P 500 in 2013, 2014 and 2016, leading to a five-star rating from Morningstar. 

More important, the PowerShares and SPDR funds don’t look at a firm’s ability to produce future buyback programs. In contrast, the AdvisorShares fund requires candidates to have robust current positive cash flow, which is a key predictor of future buyback capacity.

The importance of focusing on cash flow comes into focus if you are dubious that Washington will enact tax reform legislation. But if we do indeed see moves to lower tax rates on foreign-sourced income, then all of these ETFs would likely greatly benefit.