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Likely Capital Gain Tax Hike a Buying Point for These ETFs?

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As has been discussed for over a year, President Joe Biden is now likely to propose a plan to raise taxes on the richest Americans, including the largest-ever increase in levies on investment gains. This would be to finance about $1 trillion in social spending that serve childcare, universal pre-kindergarten education and paid leave for workers, per sources.

The new marginal 39.6% rate would be a substantial increase from the current rate of 20%, for those earning $1 million or more. This on top of an existing surtax on investment income, will lead federal tax rates for wealthy investors to as high as 43.4%, per a Bloomberg article. If applied, this would be the highest tax rate on capital gains since the 1920s. The rate has not surpassed 33.8% in the post-World War II era, as quoted on a Reuters article.

Will the Move Cause a Stock Market Crash?

Many believe that the increase in the capital-gains tax could result in a large-scale stock selloff. But in reality, that should not happen. The move of capital gain tax hike would hurt the earnings of the top 0.3% of Americans, per White House, as quoted on a Yahoo article.

The reason behind this hike is Americans who make more than $1 million fetch 30% of their income from wages, while those who make less earn 70% of their income from wages, according to Deese. This makes it important to raising the capital gains rate for those at the top so that the move could stop them from enjoying some kind of tax benefit.

But then, the hike in the same should not impact the markets over the long term. An increase in capital-gains taxes would surely impact stock-market valuations. Investors may only be willing to pay a lower multiple for near-term profits as the after-tax return would be lowered, per a barrons.com article. But that should not suppress the entire market momentum.

In 2013, the S&P 500 added about 30% despite the nine percentage-point increase in capital gains tax rate. In 1981, the tax rate dropped about eight percentage points, but the S&P 500 skidded 10%, Barrons’ article noted.

Moreover, the proposal may come across as less toothless during negotiations in Congress. For example, UBS expects a 28% long-term capital gains tax rate instead of 39.6%, as quoted on CNBC. That said, capital gains’ realizations are likely to be seen in the near term.

In 1986, as part of the Reagan tax plan, the top rate for capital gains surged from 20% in 1986 to 28% in 1987 and the just before the enactment of the move, profit booking surged by 60%, a CNBC article noted.

Buy These ETFs on the Dip?

Such a selloff could open a good buying opportunity for some ETFs. Per MarketWatch article, young investors see a “buying opportunity” on likely capital gain tax hike. Now, the question is which ETFs would see massive profit booking now, obviously the most winning ones in more than past one year.  

Against this backdrop, below we highlight a few ETFs that surged more than 100% in the past two years but still hold good fundamentals. Such ETFs could see massive profit booking and young investors could just jump into these.

ETFs in Focus

Wilderhill Clean Energy Invesco ETF (PBW - Free Report) – Up 225% past Two Years

Ark Next Generation Internet ETF (ARKW - Free Report) – Up 192.9% 

Ark Genomic Revolution ETF (ARKG - Free Report) – Up 175.7%

Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD - Free Report) – Up 121%

Online Retail Amplify ETF (IBUY - Free Report) – Up 148.8%

Global X Lithium & Battery Tech ETF (LIT - Free Report) – Up 126.5%  

Dynamic Semiconductors Invesco ETF (PSI - Free Report) – Up 119.1%              

DWA Technology Momentum Invesco ETF (PTF - Free Report) – Up 110.4%

Renaissance IPO ETF (IPO - Free Report) – Up 109.7%

S&P Retail SPDR (XRT - Free Report) – Up 104%

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