ETFs For Cash-Rich Companies
Many investors know about Apple's (NASDAQ: AAPL) cash hoard of almost $100 billion and the company's ability to generate about $30 billion annually in free cash flow. However, the iPad maker is not the only U.S. company sitting on an impressive mound of cash.
S&P 500 firms held $900 billion in cash at the end of the second, The Economist reported, citing Thomson Reuters data. That is down a bit from last year, but well ahead of pre-crisis levels.
Critics assert companies should be spending some of their cash either on new jobs, increased dividends, share repurchases or all three. Lack of clarity on the global economy and unfavorable U.S. tax laws for repatriated funds are the excuses companies most often use for not parting with some of their cash.
Still, investing in firms with large cash backstops is a fine idea. Large cash stockpiles can help companies weather downturns in the business cycle. Additionally, free cash can be reinvested in the business to boost profits, to make acquisitions or for shareholder-friendly actions such as increased dividends and buybacks.
With so many companies sitting on so much cash, investors can use ETFs to get simultaneous exposure to multiple cash-rich firms.
Technology Select Sector SPDR (NYSE: XLK) XLK is home to 82 stocks and tracks a sector littered with prodigious generators of free cash. Putting XLK's utility as a free cash ETF into context is easy. Apple has $100 billion in cash. Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) combine for almost another $80 billion. Those three companies combine for approximately a third of the ETF's weight.
iShares MSCI Canada Index Fund (NYSE: EWC) It is not just U.S. firms that are swimming in cash. Canadian companies are not slouches when it comes to cash hoards. Cash held by Canadian companies has jumped 25 percent since 2008 to almost $300 billion today, according to The Economist. Fertilizer giant Potash Corp. (NYSE: POT) is among the cash-rich Canadian firms. That stock is a top-10 EWC holdings. So are energy names. That sector represents 26.5 percent of the ETF's weight.
iShares MSCI United Kingdom Index Fund (NYSE: EWU) U.K.-based companies, many of which are familiar to U.S. investors, are also sitting on some enviable cash hoards. Royal Dutch Shell (NYSE: RDS-A), Europe's largest oil company, generated $12.6 billion in free cash in the first half of 2012, according to Bloomberg.
As for rival BP (NYSE: BP), Nomura analysts peg that company's free cash flow at $2 billion. BHP Billiton (NYSE: BHP), the world's largest mining company, had nearly $6 billion in free cash at the end of the second quarter. Shell, BP and BHP Billiton combine for more than 17 percent of EWU's weight.
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