Given that the markets are skyrocketing, the ETF industry is also booming, breaching new records in terms of inflows. This is especially true as investors have poured more cash into ETFs, breaking the 2020 records. Within four months of this year, the ETF pulled in a record $320.3 billion in fresh capital, well above last year’s $121.1 billion.
The solid trend is likely to continue, as President Joe Biden’s tax hike plan will lure more investors to the ETFs. Biden has proposed to increase the top rate on long-term capital gains to 39.6% from 20% to those making more than $1 million a year. These higher taxes would apply to taxable brokerage accounts, but not tax-deferred accounts, which include 401(k) plans. Additionally, Biden seeks to raise the top rate on income taxes to 39.6% from 37% (read: Likely Capital Gain Tax Hike a Buying Point for These ETFs?). Per Bloomberg, ETFs’ tax efficiency characteristic could be a boon for those looking at a higher tax bill. This would accelerate the ongoing shift that has shifted hundreds of billions of dollars from mutual funds to ETFs. How Are ETFs Tax Efficient?
The ETFs are more tax efficient than mutual funds. This is because mutual fund managers need to sell securities to raise cash for redemptions in case an investor exits the fund, which triggers a taxable event for all investors. On the other hand, ETFs follow an “in-kind” creation and redemption process where ETF issuers exchange shares for baskets of underlying securities, which do not trigger a taxable event.
December study by researchers at Villanova and Lehigh universities found out that over the past five years, ETFs have averaged a tax burden 0.92% lower than the active mutual funds. Moreover, particularly for high net-worth investors, tax considerations have outweighed both performance and fees as the primary driver of inflows to ETFs from the active mutual funds, the findings showed. Further, passively managed ETFs are more tax efficient than actively managed funds (read: What Holds for ETFs If Biden Hikes Capital Gain Tax?). That said, we highlighted five ETFs that have been leading the inflow list this year and will likely to do so given the proposed tax hike: Vanguard S&P 500 ETF ( VOO Quick Quote VOO - Free Report) VOO topped the asset flow creation last week, gathering $21 billion in capital. It tracks the S&P 500 Index and holds 509 stocks in its basket with information technology, healthcare, consumer discretionary, financials and communication services being the top five, with double-digit allocation each. The ETF charges investors 3 bps in annual fees and trades in an average daily volume of 4 million shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Vanguard Total Stock Market ETF ( VTI Quick Quote VTI - Free Report) This fund has accumulated $14.6 billion in capital, taking its total AUM to $239 billion. It provides exposure to the broad stock market by tracking the CRSP US Total Market Index. The ETF holds a large basket of well-diversified 3755 stocks with key holdings in technology, consumer discretionary, industrials, healthcare, and financials. It charges 3 bps in fees per year from investors and trades in an average daily volume 4.1 million shares. VTI has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. iShares Core S&P 500 ETF ( IVV Quick Quote IVV - Free Report) This fund, which also tracks the S&P 500, saw inflows of $12 billion. IVV is one of the most popular ETF with AUM of $277.7 billion and an average daily volume of 4.2 million shares. The product charges the same fees as that of the Vanguard product and has a Zacks ETF Rank #3 with a Medium risk outlook. Financial Select Sector SPDR Fund ( XLF Quick Quote XLF - Free Report) The ultra-popular financial ETF, XLF accumulated $9.9 billion so far this year. It seeks to provide exposure to 65 companies in the diversified financial services, insurance, banks, capital markets, mortgage real estate investment trusts ("REITs"), consumer finance, and thrifts and mortgage finance industries. The product has AUM of $42 billion and charges 12 bps in annual fees. It trades in an average daily volume of 55.4 million shares and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Banking Earnings Upbeat: Time to Buy Financial ETFs on Value?). Vanguard Value ETF ( VTV Quick Quote VTV - Free Report) This fund has accumulated $7.2 billion in capital, taking its total AUM to $78.8 billion. It targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. The fund holds 334 stocks in its basket with key holdings in financials, healthcare, industrials, and consumer staples. The ETF has AUM of $78.8 billion and charges 4 bps in annual fees. It trades in volume of 3.5 million shares per day on average and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: ETF Strategies to Win From Likely Rise in Inflation). Want key ETF info delivered straight to your inbox?
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