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ETFs to Follow If Tax Hike Comes After $1.9-T Biden Stimulus

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Wall Street charged up last week on the signing of the $1.9 trillion COVID-19 relief bill as promised by the Biden administration. The S&P 500 (up 2.64% last week), the Dow Jones (up 4.07%), the Nasdaq Composite (up 3.09%) and the small-cap Russell 2000 (up 7.32%) were all on an uptrend. The Dow Jones, the S&P 500 and the Russell 2000, in fact, hit new record highs.

Now, the passage of the $1.9-trillion stimulus bill has strengthened the expectation of enactment of Biden’s other proposals at the time of election campaigning. Among many agendas, Biden had plans for tax hikes. Biden’s plan is to hike the corporate tax rate to 28% from 21%.Biden is also proposing to levy a minimum tax rate of 15% — a potentially damaging outcome for some major companies that pay little in taxes.

As far as individual taxes are concerned, Biden’s proposals include a top individual tax rate of 39.6%, up from 37%. He would also expand the 12.4% Social Security payroll tax, per a Wall Street Journal article. Biden's tax plan is intended to generate more revenues are needed to pay down the huge debt incurred to fight the recession.

Stifel chief Washington policy strategist Brian Gardner expects below-mentioned tax hikes could be in the cards, as quoted on Yahoo Finance. These are (as highlighted on the Yahoo Finance article):

1.      Hiking the corporate income tax rate to 28% from 21%.

2.      Doubling the global intangible low-taxed income rate to 21% from 10.5%.

3.      Increasing the top tax rate to 39.6% from 37% for individuals making over $400,000.

4.      Taxing capital gains as ordinary income (at a top tax rate of 39.6%) for those earning more than $1 million a year.

5.      Raising the estate tax rate to 45% from 40% for assets worth more than $1 million.

A Hike in Taxes Mean a Tepid Wall Street, At Least for Short Term

The above tax plan means a somber Wall Street. First, Biden’s plan to increase the capital-gains tax could result in a large-scale stock sell-off, according to economic analyses, as quoted on CNBC. In 1986, as part of the Reagan tax plan, the top rate for capital gains surged from 20% in 1986 to 28% in 1987.

Just before the hike, capital gains’ realizations shot up by 60%, the CNBC article noted. An overall stock market selloff means a short-term rough patch for the likes of iShares Core S&P Total U.S. Stock Market ETF ITOT.

Investment bank Credit Suisse estimated that changes in tax codes would lead to a rise in the effective rate by 4% to 5%, and cut $9 off the estimated S&P 500 earnings per share. Goldman Sachs projected that Biden’s tax plan would lower its 2021 earnings estimate by 12%, as quoted on Yahoo Finance.

Some of biggest gainers of the Trump tax cut plan — banks, healthcare and retail — may feel the pain if taxes rise. So, keep a close check on the likes SPDR S&P Regional Banking ETF (KRE - Free Report)  and Invesco S&P SmallCap Health Care Portfolio (PSCH - Free Report) .

ETFs to Gain

Rareview Tax Advantaged Income ETF (RTAI - Free Report)

The Rareview Tax Advantaged Income ETF seeks total return with an emphasis on providing current income, a substantial portion of which will be exempt from federal income taxes.The expense ratio of the fund is 1.91%.

VanEck Vectors Intermediate Muni ETF (ITM - Free Report)

The underlying Bloomberg Barclays AMT-Free Intermediate Continuous Municipal Index comprises publicly traded municipal bonds that cover the U.S. dollar denominated intermediate term tax-exempt bond market. The fund charges 24 bps in fees and yields 2.0% annually.

iShares U.S. Infrastructure ETF (IFRA - Free Report)

While tax hike is a negative for Wall Street, Biden’s push for tax incentives will encourage domestic manufacturing. Biden proposed a $1.3-trillion infrastructure overhaul at the time of campaigning. The Democratic presidential candidate’s campaign aims to invest in restoring highways, roads and bridges, changing water pipes, building out rural broadband access, and updating schools among other works.

Consumer Staples Select Sector SPDR Fund (XLP - Free Report)

Biden had proposed to maintain the tax cuts that Trump signed in 2017 for households making less than $400,000, including the larger standard deduction and child tax credit. Benefits for the low-income group mean no tensions for consumer stocks, especially the staple ones.

iShares 20+ Year Treasury Bond ETF (TLT - Free Report)

If the stock market takes a dive, the bond market should gain on rising safe-haven demand. This along with a dovish Fed will make TLT a good-performing fund all over again.

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