We’ve had funds for sin stocks (the Vice mutual fund which invests in tobacco, booze and gambling) and those for biblical values (The Inspire Global Hope Large Cap ETF recently launched).
Now PassiveBeat presents a new twist on the vice/not vice idea: the Corporate Welfare ETF. This putative fund is chock full of megacaps that pay no tax and have outperformed the S&P 500. What’s not to like?
We’ve taken our cue from a report released earlier this month by the Institute on Taxation and Economic Policy (Itep) highlighting companies that have benefited from what may charitably be termed corporate welfare – tax loopholes, subsidies and so on.
Well, if you can list and rank stocks, you can call that list an index and invest in it. So how have these welfare recipients performed?
Take first the corporations alleged by Itep to have paid 'less than nothing in aggregate federal income taxes', so those that took net rebates, between 2008 and 2015. There are 18 of them, although one, Pepco, was merged away last year so I have excluded it from the index.
An equally weighted basket of the 17 remaining stocks, with dividends reinvested but no rebalancing, returned an annualised 16.6% over the past 10 years and had a maximum drawdown of 35.4%, with a beta of 0.79 and Sharpe and Sortino ratios of 0.96 and 1.55.
This was superior on all counts to the equivalent figures for the S&P 500 which saw 7.4% annual growth, a 50.8% maximum drawdown and Sharpe and Sortino ratios of 0.5 and 0.72.
The tax winners also outperformed over three and five years: annualised returns of 16.2% since 2012 and 14.9% since 2014, versus 15.3% and 10.2% from the wider market. The stocks also continued to be low beta (0.34 over five years) and broadly better on a risk-adjusted basis.
Itep also listed the 25 companies to have received the most in tax subsidies between 2008 and 2015. Again, one constituent was acquired last year – Time Warner Cable – so the final index has 24 names.
This largesse portfolio – equally weighted, with dividends reinvested, and not rebalanced – beat the S&P 500 over 10 years with annualised returns of 8.2%, but lagged by around a percentage point over five and three-year horizons. It appears it is better to be handed direct tax refunds than general subsidies.
So let’s get trading right? Not so fast…
It’s worth examining the underlying exposures in these indices. The rebate recipients were heavily skewed to utilities, with a few anomalies such as International Paper, Priceline, and General Electric. The subsidised were a thoroughly blue-chip mix of telecoms, financials, and industrials.
The latter were therefore closely correlated with large-caps despite underperforming the market more recently, but the former stocks were consistently ahead of the utilities index alone.
It’s also worth acknowledging some caveats to Itep’s methodology, which only included corporations that were profitable every year in its review period. If a business lost money in even one year, it was excluded. Given what happened between 2008 and 2015, this ruled out around half the market.
Those cited in the report have also sharply criticized it, as focusing solely on federal income tax gives only a partial picture of a company’s tax affairs and contributions.
Yet given the magnitude of the risk-adjusted outperformance by the rebated, or conceptual elegance and diversified large-cap nature of the subsidised, ETF providers may be intrigued.
Either could serve as a companion to indices of firms spending the most on lobbying, such as one compiled by Strategas, which have more of a healthcare and defence bias.
Plus, tickers like RBTE, RFND, SUBS and DODG seem available at the moment….