Trump scored a first major legislative win after more than 10 months in office following the Senate’s approval of the biggest U.S. tax overhaul in three decades “Tax Cuts and Jobs Act,” with a 51-49 vote. The move has brought Republicans closer to finalizing the $1.5 trillion tax reform by the end of the year.
The Senate bill differs from the tax bill passed by the House in mid-November on various fronts. We have highlighted some of the major differences (read: House Passes Tax Bill: Likely ETF Winners & Losers):
1. Both bills reduce the corporate tax rate from 35% to 20% while the House cuts it immediately, the Senate delays the cut till 2019.
2. The House bill shrinks the current income tax brackets from seven to four: 12%, 25%, 35% and 39.6% while the Senate version keeps the current seven tax bracket: 10%, 12%, 22%, 24%, 32%, 35%, and lowers the top rate to 38.5%.
3. The Senate bill repeals Obamacare’s individual mandate, which will leave 13 million lesser insured over the next decade. On the other hand, the House bill does not touch this aspect.
4. The House bill repeals the current medical expense deduction while the Senate aims to keep the medical expense deduction in place with a lower floor of 7.5% for tax years 2017 and 2018.
5. The House bill also has a provision to repeal deductions for student loans and other education expenses as well as estate tax. The Senate bill on the other hand keeps education deductions intact while increases the estate tax exemption to above $10 million each year after next year, and eliminates it after six years.
6. Apart from these, there are differences in standard deduction plans, mortgage interest deduction, child tax credit, and other items.
However, both are likely to negotiate to reconcile their respective bills before the signature from the president, which is expected by Christmas. The massive tax cuts will create an economic surge, boosting job growth in manufacturing and other sectors. Additionally, a lower tax rate would result in better corporate earnings and strong buyback activities (read: Q3 Earnings Effect: 5 Hottest ETF Charts).
How to Play?
Given this, investors seek to cash in on the opportunity with ETFs that are set to gain the most on tax reforms. Below, we have highlighted some of these funds.
EventShares U.S. Tax Reform ETF
This ETF is actively managed and seeks to provide exposure to investments that are impacted by the reform of the U.S. Tax Code system. It is home to 35 stocks and has amassed $2 million in its asset base in less than two months. The fund charges 85 bps in fees and expenses and trades in a lower volume of 12,000 shares.
SPDR S&P Regional Banking ETF KRE
Since banks have higher tax rates, reduced corporate rates would lead to more profits. In addition, the repatriation of hundreds of billions of dollars in cash could find a home in banks. The tax reform may also cause a rise in interest rates that would expand net margins and bolster banks’ profits. Given the tailwinds, the ultra-popular bank ETF could be a big winner. It has amassed $4.6 billion in its asset base and charges 35 bps in annual fees. The ETF has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Powell to Lead Fed: Best ETF Strategies).
iShares Russell 2000 Growth ETF IWO
Small companies pay huge taxes in America and a tax cut could be a big boon to these companies. While there are several options in this space that would gain from the proposal, IWO seems to be the most exciting choice as it offers exposure to companies whose earnings are expected to grow at an above-average rate relative to the market. It charges 0.24% in expense ratio and has $9.5 billion in AUM. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Top-Ranked ETFs That Crushed the Russell 2000 Post Election).
iShares U.S. Dividend and Buyback ETF DIVB
Lower corporate taxes would boost companies’ profitability leading to increased buybacks and fatty dividends. As a result, the new DIVB looks excellent. The fund invest in U.S. companies that return capital to shareholders by paying dividends or buying back their stock. It holds a diversified portfolio of 383 stocks and charges 25 bps in fees per year. The ETF has accumulated a decent $2.6 million in AUM within a month and trades in a paltry volume of more than 3,000 shares a day.
First Trust Consumer Discretionary AlphaDEX Fund FXD
The consumer discretionary sector will benefit from a reflation rally, as tax reforms will help businesses and consumers, boosting discretionary spending. FXD could be a compelling choice with AUM of about $475.3 million and expense ratio of 0.63%. The fund trades in average daily volume of 91,000 shares and has a Zacks ETF Rank #2 with a Medium risk outlook.
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