One of the ideas that seemed like a no-brainer in a Donald Trump-led stock market was to bet on a bigly benefit from stock buybacks. Analysts agree buybacks will blossom if the administration gets its way on corporate tax cuts.
So how have domestic stock buyback funds done since Trump's election? Looking back, you wouldn't buy them. They've been laggards compared to a straight-up S&P 500 bet.
The two exchange-traded funds whose strategy is to ride U.S.-based companies that buy back the highest percentage of their shares have risen less than the Standard & Poor's 500-stock index this year. The best buyback ETF, by far, is the one most divorced from U.S. tax policy: the $125 million PowerShares International Buyback Achievers Portfolio (), which is up 9 percent this year, according to Morningstar data through April 20, placing it way ahead of the U.S. buyback funds and also ahead of the global MSCI ACWI index. In general, the U.S. market this year.
John Feyerer, director of equity ETF product strategy at PowerShares, said IPKW may continue to benefit from ongoing quantitative easing in both the EU and Japan, which has served to strengthen corporate balance sheets and provide cash for buyback programs. Companies in Japan, in particular, have announced a record amount of buyback programs amidst an environment that has a continued focus on enhancing shareholder value. The ETF has nearly one-third of its weight in Japanese equities and an additional 25 percent of its weight in European equities.
The biggest buyback ETF has done the worst: Invesco's $1.4 billion PowerShares Buyback Achievers Portfolio (), including U.S. stocks, is up just 2.88 percent. The relatively small State Street's SPDR S&P 500 Buyback Achievers Fund () is up 4.47 percent. That's despite projections by Goldman Sachs that big companies will spend as much as three-quarters of any gains from repatriating profits made outside the United States on buybacks. They spent repatriated gains on buybacks the last time Congress offered a tax holiday, even though it was technically prohibited, according to congressional research.
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"Mostly, this has been a wait-and-see trade," said David Nadig, CEO of ETF.com. "For traders I talk to, tax reform seems like such an uncertainty at this point that it's hard to bet on anything."
There are three big reasons why Trump hasn't been able to boost the buyback bandwagon much, experts say.
1. The biggest holdings in buyback funds aren't the same companies that have the most offshore cash, and which are expected to benefit most if Trump's expected tax proposal becomes law.
Buyback funds pick stocks that have bought back a lot of shares in the past, but companies like Apple and Microsoft, which are sitting on the most offshore cash, have not bought back a high enough percentage of their shares to be major holdings for buyback funds. Technology stocks have led the U.S. market this year.
PowerShares Buyback Achievers Portfolio top holdings include Boeing, McDonalds, General Electric, Goldman Sachs, United Technologies, Gilead Sciences and American Express. The tech sector is less than 9 percent of the ETF, according to Morningstar, while financials and consumer cyclicals comprise roughly 50 percent. The five biggest winners under the repatriation provision of Trump's bill are expected to be Apple, Microsoft, Alphabet, Cisco Systems and Oracle, Moody's Investor Service estimated last fall. Not one of these stocks is among the top 25 holdings in PKW, according to Morningstar ETF holdings information.
"Apple has done some buybacks, but not to the extent of a Boeing or a GE," Nadig said. He added that the move in buyback shares "won't be about the funds — it will be about the single-share plays" that will become big buyers of their own stock once the tax break is law.
Although the ETF's methodology looks at the corporations that have bought back shares outstanding of 5 percent or more in the trailing 12-month period, the ruled-based approach serves investors well in that they are able to understand just how PKW will behave, Feyerer said. "It takes the emotional aspects out of shorter-term trends that may or may not prove beneficial." And until tax reform and cash repatriation become reality, "we think it's most prudent for investors to consider strategies that have proven value over time," he added.
2. The Trump tax bill may be arriving sooner than expected, but that comes after the administration tempered expectations. It's been a chaotic process that raises doubts about passage.
For months the White House was saying a tax bill could be approved by summer. Then last week Treasury Secretary Steve Mnuchin said the timeline was aggressive and unrealistic. But then Mnuchin reversed his position on April 20, saying tax reform would come very soon. The next day, Trump said tax reform would be unveiled this week and include the biggest tax cut ever.
But Trump seemed to waver on the timing, with the White House issuing a subsequent statement, saying, "The president was saying what we've been saying all along, that he wants to do tax reform as quickly as possible while still doing it right." Trump is expected to present a broad framework for tax reform, but he has been insisting it include a 15 percent corporate tax rate even if that complicates deficit-reduction efforts.
The biggest problem is that the White House wants to revive its failed health-care proposal in some form first. The savings from eliminating health-insurance subsidies for middle-class families and young workers who don't get coverage at work were expected to help pay for the tax-cut package, says C. C. Huang of the Center for Budget and Policy Priorities. Blackstone group chair Steve Schwarzman, who heads a Trump CEO advisory council, said on CNBC earlier this month that a new health-care bill will probably be considered before tax changes. "Some of these issues are tough, because the numbers don't work easily," he said. "On the tax side, I think it will be slower. People don't want to make a mistake.''
But prospects for Trump's health plan remain dubious, even in amended form, given the hard-to-reconcile split between the House Freedom Caucus, a group of about 15 staunch conservatives who wanted even deeper Medicaid cuts than in the failed bill, and a group of about 10 GOP moderates who wanted the exact opposite. When Mnuchin said last week that tax reform would not be delivered on Trump's original timeline (August), he cited the health-care bill failure among the reasons. On Monday the White House said a vote on a new health-care bill may not come for weeks.
Assuming the health-care issue is resolved, the GOP is split deeply about how to cut taxes and whether it's important to restructure the code in a way that doesn't add to the budget deficit. In particular, Republicans from different parts of the country are split over whether to use import taxes on consumer goods to help pay for corporate tax cuts, a move vocally opposed by Republican Sen. Tom Cotton of Arkansas, whose state is home to Wal-Mart Stores' headquarters.
"If I were an investor, I wouldn't be trying to model U.S. tax law a year from now," said Alex Bryan, director of passive strategies research at Morningstar. "It's too hard to have an edge.''
3. Buybacks complement fundamentals; they don't replace them.
Apple is a leading example here: Its prospects this year probably have been helped by the prospect of bigger buybacks but helped more by the looming prospect of 8th-generation iPhones, expected this fall. Industry mavens are high on the phone's rumored glass-and-stainless-steel body, wireless charging and other new features. Shares, up more than 20 percent year-to-date, have also been boosted by a recovery in sales growth in China.
The lesson: Buybacks do often help stocks of well-run companies beat the market. PKW has outperformed the S&P 500 over the past 10 years. It has gained 8.4 percent per year since 2006, topping the 7.2 percent gain (sans dividends) for the S&P 500. But the hopes for a Trump bump adding to the normal case for buyback-focused investing has fizzled.
— By Tim Mullaney, special to CNBC.com