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Wealthy Americans fleeing tax hikes could lead to a switch to ETFs

(Bloomberg) – The burgeoning ETF industry may be poised to attract even more liquidity in the years to come, as wealthy Americans facing higher capital gains taxes seek to limit what they owe Uncle Sam. Compensation of $ 1 million a year on investment profits would accelerate a change that has already seen hundreds of billions of dollars migrate from mutual funds to funds traded on the stock exchange, according to market watchers. This is because ETFs are generally more tax efficient, resulting in fewer capital gains disbursements which for some may soon become much more expensive. in asset allocations in recent years. While the administration’s plan is still in its infancy and will certainly be the subject of scrutiny by lawmakers in the months to come, even a gradual increase in the earnings rate equity would likely boost ETF use, according to David Perlman, ETF strategist at UBS Global. Wealth management. “If the capital gains tax rates are higher, if you have a choice of a structure that helps defer capital gains and gives you more control over when to recognize those gains, you would be more inclined to to go that route, ”Perlman said. When an investor leaves a mutual fund, the fund manager must sell securities to raise cash for redemption. The same investor leaving an ETF can sell their shares to another investor, which means that neither the fund nor its manager has made a taxable transaction. The ETF issuer trades the underlying securities of the fund with a market maker rather than making transactions in cash – meaning the ETF rarely makes a taxable sale. A study carried out in December by researchers at universities Villanova and Lehigh revealed that over the past five years, ETFs have applied a tax on average. 0.92% lower charge than active mutual funds. Additionally, especially for high net worth investors, tax considerations have overtaken both performance and fees as the primary driver of flows out of active mutual funds to ETFs, the results show. be a godsend for ETFs, ”said Nate Geraci, chairman of the ETF Store, an advisory firm, via email. “Despite significant market share gains by ETFs over the past decade, there are still trillions of dollars stuck in less tax efficient mutual funds.” Last year alone, the ETF industry took in nearly $ 500 billion, while mutual funds lost around $ 362 billion, according to data compiled by Bloomberg ETF Advantage Most ETFs do not practically pass more capital on to shareholders these days. According to Todd Rosenbluth, the company’s head of ETF and mutual fund research, only 3 out of 585 in a CFRA analysis made disbursements in 2020 in an April 26 report. During the same period, 37 of the 39 domestic equity mutual funds of T. Rowe Price Group Inc. recorded a capital gain, according to the analysis. avoid paying higher capital gains taxes in the future, ”he added. The simple discussion of capital gains reminds investors of the industry’s innate tax advantages over mutual funds. Others are not convinced that a higher capital gains rate will do much to stimulate entry into ETFs. High net worth investors would have to sell their mutual fund holdings to effect the switch, which would bring significant tax liabilities in the process, said Michael Zigmont, head of trading and research at Harvest Volatility Management. “I see this tax hike is neither good nor bad for ETFs. “, Did he declare. Meanwhile, ETFs do not meet all investment needs. The U.S. retirement system remains heavily biased towards mutual funds, for example. Nonetheless, Perlman agrees with Rosenbluth that the potential tax change could even impact investors below the annual income threshold of $ 1 million. or fearing that the threshold will be lowered later, are also likely to shift their future allocations, he said. “The incentives apply more broadly than just those affected by the proposal,” Perlman said. Please visit us at Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP

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Clint Love

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