Last year alone, the ETF industry took in almost $500 billion, while mutual funds lost about $362 billion, according to data compiled by Bloomberg.
ETF Advantage
Most ETFs hardly pass along any capital gains to shareholders nowadays. Only 3 of 585 in a CFRA analysis made disbursements in 2020, Todd Rosenbluth, head of ETF & mutual fund research at the firm, wrote in an April 26 report. Over the same span, 37 of 39 domestic equity mutual funds from T. Rowe Price Group Inc. incurred a capital gain, the analysis showed.
“We expect more people that mix ETFs and mutual funds together will be more inclined to shift toward strategies to avoid paying higher capital gains taxes in the future,” Rosenbluth wrote.
Even investors not affected by the higher rate could migrate toward ETFs, he added. Simply the discussion of capital gains reminds investors of the industry’s innate tax advantages over mutual funds.
Others aren’t convinced a higher capital-gains rate will do much to boost inflows into ETFs. Wealthy investors would have to sell their mutual fund holdings to make the switch, triggering significant tax liabilities in the process, said Michael Zigmont, head of trading and research at Harvest Volatility Management.
“I see this tax hike not being good or bad for ETFs,” he said.
Meanwhile, ETFs don’t suit every investment need. The U.S. retirement system remains heavily geared toward mutual funds, for example.
Nonetheless, Perlman agrees with Rosenbluth that the potential tax change could even have an impact on investors below the $1 million annual earnings threshold.
Those expecting to soon find themselves in the upper tax bracket, or concerned the threshold could be lowered down the road, are also likely to shift their future allocations, he said.
“The incentives apply more broadly than just to those impacted by the proposal,” Perlman said.
This article was provided by Bloomberg News.