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3 ETF Areas May Come Under Pressure on Tax Reform

Sanghamitra Saha
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With the U.S. tax reform looking more realistic, the global investing world is rejoicing the expected move. However, all is not rosy for the investing landscape. There are certain areas that maybe troubled if the tax reform is passed with the current proposals. Below we highlight those areas (read: Senate Passes Tax Bill: 5 ETFs to Buy Now).


Provisions in both the House and Senate tax bills would adversely impact hospitals. The Tax Cuts and Jobs Act (H.R.1) "would eliminate hospitals' ability to access low-cost capital financing through tax-exempt private-activity bonds and advance refunding bonds". "In addition, the bill would impose a 20% excise tax on pay for certain nonprofit hospital employees," as quoted on healthleadersmedia.com.

With about 80% of community hospitals not-for-profits, the pressure on the sector is now understandable. These hospitals manage billions of investments through the tax-exempt municipal bond market.

Now, like most analysts and industry experts, we too believe that non-or-limited accessibility to private activity bonds or tax-exempt muni bonds may keep hospitals away from investing in newer technologies. Maybe patients will have to bear higher costs for their treatments.

Hospital stock HCA Holdings Inc. HCA may bear the brunt of the likely tax reform. On the ETF front, healthcare providers fund iShares US Healthcare Providers IHF or medical devices fund iShares US Medical Devices IHI fall under the losers’ list.

Renewable Energy

Renewable energy sources such as wind and solar power may have expanded rapidly in recent years on declining costs and rising importance of the usage of sustainable energy.  A still-vague provision of the tax bill — “part of a provision to limit tax deductions for certain overseas activities — threatens a financing mechanism that generated $13 billion in investment in U.S. renewable energy this year,” as per energy research firm Bloomberg New Energy Finance.

This provision may put pressure on the growing prospect of the renewable energy. Solar stocks like Vivint Solar Inc. VSLR and JinkoSolar Holding Co. Ltd. JKS may be at knifepoint now. As a whole, funds like First Trust ISE Global Wind Energy Index Fund FAN, Guggenheim Solar ETF TAN and PowerShares Cleantech Portfolio PZD may be under pressure (read: Q3 Earnings Effect: 5 Hottest ETF Charts).

Private Equity

The tax package that passed the House is likely to eliminate the deduction on tax-exempt private activity bonds as removing the program would result in about $40 billion of savings for the government over a decade.

Threat to the private equity industry is like come in another form. The tax reform, if materialized, would cut the corporate tax rate to 20% from 35% and “allow companies to instantly deduct the costs of new investments in equipment for a period of five years.” So, companies will now require less private equity fund for capital spending unlike they did it before.

Moreover, some private equity firms mainly use debt to finance acquisitions and some hold highly-indebted companies. Now, with a provision of “proposed cap on the tax deductibility of interest payments exceeding 30 per cent of income,” these private equity companies with heavy debt exposure will feel the pressure, as per an article on Financial Times.

All these will likely make “buying and selling US companies harder” in the coming days for private equity firms. Thus, PowerShares Global Listed Private Equity ETF PSP should be closely watched.

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ISHARS-US H C P (IHF): ETF Research Reports
GUGG-SOLAR (TAN): ETF Research Reports
FT-GLB WIND EGY (FAN): ETF Research Reports
PWRSH-GLBL LIST (PSP): ETF Research Reports
ISHARS-US MED D (IHI): ETF Research Reports
HCA Holdings, Inc. (HCA) : Free Stock Analysis Report
JinkoSolar Holding Company Limited (JKS) : Free Stock Analysis Report
Vivint Solar, Inc. (VSLR) : Free Stock Analysis Report
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