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Tax Bill: What ETF Investors Need to Know

Sanghamitra Saha
TransUnion (TRU) has an attractive business model with highly recurring and diversified revenue streams, significant operating leverage and low capital requirements.

This could be the best Christmas gift for Republicans as the U.S. House of Representatives gave final nod on Wednesday to the biggest revamp of the US tax code in three decades, pushing forward a sweeping $1.5 trillion tax bill to President Donald Trump for his signature. The House passed the measure by 224-201 votes, while the Republican-led Senate had approved it 51-48.

The final version agrees to “give corporations a massive permanent tax break, temporarily cuts rates for individuals, and repeals the Affordable Care Act’s individual mandate — a move that is estimated to leave 13 million fewer insured in the next 10 years.”

The final version cuts “the corporate rate from 35% to 21%, gives pass-through businesses like the Trump Organization a 20% tax deduction, raises the standard deduction, expands the child tax credit, and temporarily lowers individual rates across the board.”

Let’s take a look at the short, mid-and long-term ETF gainers and losers.

Long-Term Gainers

U.S. Tax Reform Fund TAXR

This newly launched fund looks to offer capital gains by investing in market segments that “will be impacted by the enactment of changes to the U.S. Tax Code” according to the issuer (read: House Passes Tax Bill: Likely ETF Winners & Losers).

iShares U.S. Real Estate ETF IYR

With Trump’s tax bill proposing to slash corporate tax of real estate developers by 14%, as well as cutting personal taxes for real estate behemoths, the real estate investors are likely to celebrate in the coming days. This along with still-moderate U.S. Treasury yields make this space a wining bet right now.

iShares US Dividend and Buyback ETF DIVB

The new fund looks to track the Morningstar US Dividend and Buyback Index. The Trump administration is also proposing a move from the current worldwide tax system to a territorial system, allowing companies to send their offshore profits back to the United States without extra taxes. This will result in extra cashes which may prove beneficial for shareholder value maximization (read: What Makes iShares' Dividend and Buyback ETF Launch Timely?).

Mid-Term Winners

Republican Policies Fund GOP

The passing of the tax bill is a sign of success for the GOP. This is why investors’ interest in this fund is here to stay. This new fund targets market segments that are likely to be moved (deemed by the issuer) by the enactment of Republican Policies.

Short-Term Winners

Consumer Discretionary Select Sector SPDR ETF XLY

Per a Tax Policy Center analysis, the bill will lower taxes for Americans in all income groups in 2018, but increasing after-tax income by an average of 2.2%. Plus, the tax cut for individuals will gradually decrease over time and completely close in 2025.

Analysts’ explanation is that the “thresholds for individual tax brackets are adjusted according to chained CPI, a lower measure of inflation than standard CPI, which is used currently. This will increase tax revenue over time by pushing people into higher tax brackets.” This means consumer discretionary stocks and ETFs will be short-term gainers and long-term losers. 

iShares Russell 2000 ETF IWM

Investors should be choosy while picking small-cap ETFs as a tax-reform play. This is because tax cuts will help corporations to generate more profits. Plus, realizing the tax cuts, people will likely boost its expenditure. Since small-cap stocks are domestically focused, these higher outlays will boost the business of the small corporations (read: Tax Reform: A Boon or Bane for Small-Cap ETFs?).

But there is a provision in the tax blueprint that calls for limiting “deductions to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization) for four years, and 30% of EBIT after that.” Many small-cap stocks are debt-reliant for their survival and lack cash. So, in the long run things may not look that rosy for small-caps.

Losers

SPDR S&P Homebuilders ETF XHB

Homebuilders are expected to lose as the new tax bill lowers the value of the mortgage interest deduction to $750,000 from $1 million, thereby limiting the purchase of luxury homes. As result, housing ETFs like XHB may come under pressure.

iShares National Muni Bond ETF MUB

Muni bonds may lose luster. These bonds are excellent choices for investors seeking a steady stream of tax-free income. But with President Trump lowering personal income tax rates, investors’ desire for a tax shelter in munis may be quelled. This may put pressure on funds like MUB (read: Trump Tax Plan & Muni Bond ETFs: What Investors Need to Know).

Health Care Select Sector SPDR ETF XLV

With the repeal of ObamaCare individual insurance mandate in the final bill, health care sector understandably came under pressure. Funds like XLV could thus feel pressure(read: Healthcare ETFs Head to Head: XLV vs. VHT).

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ISHARS-R 2000 (IWM): ETF Research Reports
 
SPDR-HLTH CR (XLV): ETF Research Reports
 
SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
SPDR-CONS DISCR (XLY): ETF Research Reports
 
ISHARS-NAMTF (MUB): ETF Research Reports
 
ISHARS-US REAL (IYR): ETF Research Reports
 
US-TAX REFORM (TAXR): ETF Research Reports
 
REP-POLICIES (GOP): ETF Research Reports
 
ISHR-US DIV BB (DIVB): ETF Research Reports
 
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