Wealth Management
(New York)
ETFs are obviously the biggest financial product of the decade, and have been very broadly adopted by advisors. However, how advisors actually use them varies greatly, partly due to the diversity of the asset class. There are around 2,200 ETFs covering a seemingly endless variety of niches. But within that cornucopia of offerings, which can be dizzying, lays the opportunity to personalize. Specifically, the large variety of highly specialized approaches allows advisors to be very tactical with portfolios without the need to buy specific stocks. Further, since ETFs are replicating a benchmark, they do not suffer from “style drift” like mutual funds do. In that way, the sectors/niches they track are more reliable and can be depended on for the role they play in a portfolio.
FINSUM: This might be obvious to some, but there are many out there who still only use ETFs are ultra-cheap trackers. Some of the new offerings provide really interesting exposure to specific areas—part of the reason they have been heavily adopted by hedge funds.
(New York)
One of the oldest tricks in the American tax book is seeing new life because of recent changes to the tax code. The process is referred to as upstream tax planning. Changes to the tax code mean that investors can take assets that have seen capital gains and transfer them to a trusted older relative with the understanding that they will be bequeathed. When that asset is re-inherited by the original donor it now has a new basis and can be sold into the market immediately with no taxes due despite the initial capital gains. One estate planner summarizes the changes, saying “People didn’t want to use up their estate tax exemption, but the whole paradigm has shifted because of this new high exemption amount … When they doubled the exemption, everyone thought they’d do away with the step-up in basis at death, but that didn’t happen. So this creates a huge opportunity for taxpayers”.
FINSUM: This is a very good loophole, but it does have a trust component where the donor needs to be confident the beneficiary will hold onto the asset!
(New York)
Barron’s has interviewed some of the top financial advisors in the country to figure out how they incorporate ETFs into their portfolios. We thought our readers might be curious. Raj Sharma, from ML, said that he thinks ETFs are just a tool and that active management still has a big role to play, especially in emerging markets and small caps. One top advisor, for whom ETFs comprise 50% of their business, says they use options bets against ETFs, something you can’t do with active funds. Another top advisor from ML, Peter Rohr, summarized ETFs nicely, saying: “ETFs allow us to control the controllable. We can control fees, we can control taxes, and we can control risk level”.
FINSUM: ETFs are a very flexible, and largely inexpensive product, facts which explain their explosive growth. However, that flexibility also means it takes strategy to put them to their best use.
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(Washington)
Not to be outdone by the DOL, the SEC made some comments on its forthcoming Best Interest Rule yesterday. SEC chief Clayton has been tightlipped about the rule and its updates, but yesterday said that it would be out soon, likely much sooner than expected. The expectation has been that the SEC would debut the rule in the fall, but speaking on timelines Clayton said “Wait and see … You won't have to wait long”. Reporters taking note of the comment say he suggested the final rule was imminent.
FINSUM: We bet some unveiling of the final rule happens before Memorial Day. This means the DOL’s updated rule is likely coming very soon as well, as they are working in concert.
(Washington)
In what comes as very disappointing news to many advisors, the DOL has just confirmed worst fears—it is officially bringing the fiduciary rule back. The DOL mentioned this idea in passing last year, but not given formal word on it. However, speaking before Congress yesterday, DOL chief Acosta confirmed that the fiduciary rule was coming back and that the agency was coordinating with the SEC. Acosta declined to give a timeline, but late this year is the anticipated unveiling of the new rule. According to one industry commentator, "We see this as a positive for financial advisers and active [investment] management as the Labor standard is unlikely to include class-action liability”.
FINSUM: It is too early to know if this is good news or bad because no one has clarity on what the DOL is doing. That said, our instinct is the new rule will be less onerous than previously.
(New York)
Vanguard funds have been performing well for years. That performance, mixed with ultra low costs is the reason they have thrived over the last decade and now contend for being the largest asset manager. However, there is a little known reason they have done so well—they employ a patented system for minimizing taxes in mutual funds. Vanguard uses a trading technique employing “heartbeat” trades which move stocks between ETFs and mutual funds in such a way that completely eliminates the taxability of their capital gains. Vanguard employs the strategy on 14 funds, and those have reported a combined $191 bn in gains while reporting zero to the IRS. Vanguard says the technique is entirely legal and has a patent on it through 2023.
FINSUM: This is an excellent competitive advantage and we thought advisors would like the view under the hood as to why Vanguard is thriving as one of the very best fund providers.