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ETFs at Risks If Tax Law Changes in U.S.

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After party time thanks to the passage of the $1.9-trillion stimulus bill that included $1,400-stimulus check under the Biden administration, pain points may also hit United States. A hefty Biden stimulus 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. And this new bill may come across as the first federal tax hike in nearly three decades as the new tax law is expected to include a corporate tax hike and an increase in the income tax rate for high-earners.

Earlier this month, White House press secretary Jen Psaki told reporters that while “there isn’t a package yet,” Biden’s next proposal will look to accomplish components of his “Build Back Better” agenda from the 2020 presidential campaign trail, as quoted on a Yahoo Finance article. However, Psaki added the tax hike will only impact those households making $400,000 or more.

Stifel chief Washington policy strategist Brian Gardner believes that the below-mentioned tax hikes are 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.

Against this backdrop, below we highlight a few ETF areas that could be under pressure in the coming days (read: ETFs to Follow If Tax Hike Comes After $1.9-T Biden Stimulus).

Buyback ETF

In the face of higher corporate taxes, companies’ profitability would be constricted. This lower profitability may keep companies from enhancing shareholders’ wealth. A higher U.S. corporate tax means that a solid amount of U.S. corporate cash could be held overseas. Those cash may not be repatriated and used for buybacks. Invesco Buyback Achievers Portfolio (PKW - Free Report) can be a loser of this tax hike move.

We may also see the rise in tax inversion ahead. Corporate tax inversion is a form of tax avoidance where a company incorporates itself in lower-tax jurisdictions, becomes a subsidiary of the foreign parent and shifts its tax residence to that low-tax foreign country.

Dividend Growth ETF

Increased tax outlays may also result in slimmer and less-frequent dividend hikes. This puts dividend growth ETFs likeSPDR S&P Dividend ETF (SDY - Free Report) in focus. The stocks making up this ETF has a history of consistent dividend hikes.

Small-Cap Growth ETFs

As per an article published on CNBC, small companies – which are more domestically focused and have les foreign exposure – pay huge taxes in America. This is because these pint-sized companies can’t pile cash in foreign lands. So, a hike in corporate tax rates would be a headwind to these companies. This in turn should hurt small-cap growth ETFs like iShares Russell 2000 Growth ETF (IWO - Free Report)  and Vanguard Small-Cap Growth ETF (VBK - Free Report) .

ETFs with Exposure to Highest Tax Payers

In 2016, CNBC revealed the names of some of the highest tax-paying companies of the S&P 500. These companies are Aetna (AET), Anthem (ANTM), Colgate-Palmolive (CL), Hershey (HSY), Masco (MAS) and Unitedhealth Group (UNH) to name a few. So, ETFs having considerable exposure to these stocks are likely to lose in a high tax structure. Unitedhealth and Anthem have considerable exposure in iShares U.S. Healthcare Providers ETF (IHF).

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