During the recent recession, many companies switched into crisis mode, slashing expenditures and conserving cash in fear that the downturn would drag on for years and sustained negative cash cash flows would push them to the brink of collapse. With a recovery that has been impressive for both its stability and strength, many firms have been able to sock away record amounts of cash reserves (see the top ten performers since the market bottom). With the worst seemingly behind many industries, some are beginning to wonder if/when many firms will begin to free up their “rainy day funds” to build value for shareholders.
These sums are not petty amounts of cash; according to a recent article from Barron’s, “Apple sits on almost $40 billion and has no debt. Google has $24.5 billion and no debt. Cisco has $25.1 billion of net cash.” In fact, the S&P 500 recently reported $1.1 trillion in cash on balances sheets, and many investors believe this massive sum will have to be deployed either as dividends, stock buybacks, or as funding for acquisitions. Below, we profile two ETFs that could see some interesting movements as these cash-rich firms decide to start putting their money to work.
PowerShares Buyback Achievers Fund (PKW)
If companies do not believe that competitors are fairly valued (and are thus poor takeover targets) and do not want to issue dividends, stock buybacks are an interesting option. This strategy could make companies eligible for inclusion in the Share BuyBack Achievers Index, a benchmark that follows companies that have repurchased at least 5% or more of their outstanding shares for the trailing 12 months. PKW currently consists of 326 securities and is heavily focused on large cap securities which make up slightly more than 60% of the fund’s total assets. Some of the top holdings include oil giants ConocoPhillips (4.7%), Exxon Mobil (4.3%) and fast-food giant McDonald’s (4.2%). Currently, the fund is heavily slanted towards consumer discretionary (26%) and manufacturing names (15%), with a large allocation to information technology (17%) as well. If some of the current large cash holders, which include many tech companies, start to buy back shares, the composition of the fund could be in flux. PKW charges an expense ratio of 0.60% and is up about 45% over the past 52 weeks, beating the broad market over that period by a significant margin (see charts of PKW here).
IQ ARB Merger Arbitrage ETF (MNA)
While a wave of mergers and acquisitions brought about by companies deploying their cash may not directly impact MNA, it could greatly increase the investable universe for the fund and give it more opportunities to produce gains through a “merger arbitrage” strategy. This ETF follows the IQ ARB Merger Arbitrage Index, which seeks to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. This differentiated approach is based on a passive strategy of owning certain announced takeover targets with the goal of generating returns that are representative of global merger arbitrage activity. The underlying index also includes short exposure to global equities as a partial equity market hedge.
MNA has close to 18% in information technology firms, 9.6% in health care and 8.9% in energy firms. Currently, its largest holdings include Sun Microsystems (7.8%), and energy firm BJ Services (7.1%). So far in 2010 MNA has produced a gain of about 4%, and charges an expense ratio of 0.75%. However, the fund has produced an extremely low volatility compared to the general market. MNA’s Volatility (50 Day) was just 17.4%, compared to more than 300% for SPY (see more fundamentals on MNA here). Read more about the merger arbitrage strategy here, and sign up for our free ETF newsletter for more ETF insights.
Disclosure: No positions at time of writing.