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GOP Nears Tax Reform: Buy These ETFs

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In a step forward toward tax cuts, Senate Republicans okayed a $4-trillion budget measure on Oct 19. The chamber agreed to the budget resolution by a 51-49 vote, as per The Senate would now permit a net $1.5 trillion tax cut over a decade. Republicans intend to accelerate the timeline on tax reform and the White House intends to turn it into a law by the end of the year.

At the end of September, Trump revealed his much talked-about tax plan, suggesting comprehensive tax cuts for individuals and corporations. Some of the key suggestions are a cut in the corporate tax rate to 20% from 35% and slashing of the number of individual tax brackets to three from seven.

The lowest bracket will increase from 10% to 12%, the middle bracket will be 25%, and the highest tax bracket will fall from 39.6% to 35%. The proposal will now be studied and perhaps altered in the coming days (read: Build Your Portfolio With 4 ETFs in Q4).

Earnings are expected to see a considerable gain if the tax reform takes shape. So, stocks are riding higher on hopes this reform.  Steven Mnuchin, U.S. Treasury secretary, already cautioned Congress that the U.S. stock markets will chop off a “significant amount” of their recent gains if tax reform does not materialize.

As per an article published on Investor’s Business Daily, Wall Street hearsay is that Trump’s tax cuts would see the day of light in the first half of 2018, but the program would be ‘smaller’ in size. Analysts at Morgan Stanley and Goldman Sachs “have indicated that they see a 25% corporate tax rate as much more likely than the 20% that the White House says is nonnegotiable.”

However, a 25% tax rate would lead S&P 500 earnings to expand 8% and push the index north to 2650 by the yearend, according to Goldman chief equity strategist David Kostin, quoted on Investor’s Business Daily.

However, there are several hurdles in the way to tax cuts. As per an article published on, “there appears to be very little chance Republicans will find the budget offsets to make corporate tax cuts permanent.” Still, things are looking bright at this stage when it comes to tax reform and put these ETFs up for gains.

U.S. Tax Reform Fund

This newly launched fund looks to offer capital gains by investing in market segments that the issuer thinks “will be impacted by the enactment of changes to the U.S. Tax Code.” It charges 85 bps in fees. No stock accounts for more than 3.49% of the fund.

Republican Policies Fund

This new fund targets market segments that are likely to be moved (deemed by the issuer) by the enactment of Republican Policies. The fund charges 75 bps in fees. No stock accounts for more than 3.7% of the fund.

Janus Small Cap Growth Alpha ETF (JSML - Free Report)

The fund picks pint-sized stocks by assessing each company’s performance in three factors: growth, profitability and capital efficiency. The fund charges 50 bps in fees. No stock accounts for more than 3.05% of the fund.

As per an article published on CNBC, small companies, which are more domestically focused and have less foreign exposure, pay huge taxes in America. This is because these pint-sized companies can’t pile up cash in foreign lands. So, a slash in tax rates would give a big-time benefit to these companies (read: Asset Report of September: Small Caps Rule).

PowerShares KBW Regional Bank Portfolio (KBWR - Free Report)

As per an article published on CNBC, a senior analyst at AB Bernstein noted that “large banks likely would see 2018 earnings per share jump by 12 to 20 percent, while midcaps would see growth of 15 to 25 percent.” Compared with the other sectors, the gain from tax reforms for large-cap banks would be in the 4% to 12% range while small-caps would see a boost of 7% to 17%, according to the article published on CNBC. This brings KBWR in the spotlight. No stock makes up for more than 3.83% of the 50-stock fund.

PowerShares Buyback Achievers Portfolio (PKW - Free Report)

The Trump administration is also proposing a move from the current worldwide tax system to a territorial system, letting companies to send their offshore profits back to the United States without extra taxes. Since Trump proposes a tax on more than $2.5 trillion in offshore earnings, tax cuts and a one-time repatriation tax could boost share repurchases by companies.

This makes the case for buyback ETF investing important. Boeing is the top stock of the 223-stock fund with about 6.3% exposure. The fund charges 63 bps in fees (read: Bet on These ETFs on New Hopes for Tax Reform).

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