ETF Wrap: Kidney Beans, And Does the Tax Collector Help?

There is an old view of financial markets that says that markets always revert to mean over time. There is another who says that excesses in one direction are usually accompanied by excesses in the other. Reversal to the mean and back to the worst, so to speak.

Yet markets and financial services evolve, and today’s Wrap is a microcosm of everything that has made the ETF the financial product of the 21st century. We spoke to CFRA’s Todd Rosenbluth about tax efficiency and Sal Gilbertie about putting corn and soybeans in an ETF. Gilbertie told us that he started his ETF business because he wanted to offer common investors access to agricultural futures, just like institutional investors. Rosenbluth reflected that if ETFs had somehow come first, mutual funds probably never would have existed. ETFs are what happens when financial products and services are designed for end investors, not asset managers. Things will continue to evolve, of course, probably in ways we can’t even imagine. After all, ETFs were born out of the 1987 market crash. Markets could never fall 22% in a single day, of course: not just because of circuit breakers, but because we’ve come up with new ways to respond to shocks from the market. market. And maybe that’s the point. Stay tuned and thanks for reading. Even more ETF-ication of everything? Last week’s suggestion that President Joe Biden might raise the capital gains tax briefly reduced risky assets, but it also offered good news for the ETF industry. Since ETFs are by their nature more tax efficient than mutual funds, a higher tax regime could lead to mutual fund investors looking for ETFs, many observers think. As a reminder, when investors in an ETF sell their shares, the negotiation necessary to free up cash for that investor usually takes place between market makers. That keeps other shareholders protected from capital gains implications. In mutual funds, however, the fund manager must buy and sell shares held by the fund, which means that investors who own shares in the fund during the year may be subject to a tax event due to the redemption of another shareholder. . There is little data on the exact numbers for each of those two situations, but as Todd Rosenbluth of CFRA said, “It is relatively rare for a stock ETF to incur a capital gain for existing shareholders and it is common for mutual funds of peers do. “(Here’s a Morningstar analysis on the subject.) In fact, according to an analysis by Rosenbluth, ETFs from the largest fund providers (iShares, Invesco, Schwab, State Street Global Advisors and Vanguard) account for 88% of all ETF assets. Among nearly 600 of those companies’ equity funds, only three ETFs had capital gains distributions to investors last year. If capital gains become more restrictive, some investors could leave mutual funds for ETFs, Rosenbluth thinks. And more mutual fund managers can transition their existing products to ETFs, as some companies have just started to do, to avoid losing customers. “Given all the benefits of ETFs: tax efficiency, liquidity , affordability and the way they have cut costs, if ETFs existed 50 years ago, we would never have seen mutual funds, ”Rosenbluth told MarketWatch.“ ETFs are designed for the en around which we find ourselves today, where investors are more in charge of their financial objectives and where more money is spent on their bottom line and less on the manager. ” There is a lot of inertia in keeping money in mutual funds, Rosenbluth acknowledged, including the huge amounts of money invested in defined contribution plans, in which the benefits that differentiate ETFs from mutual funds are not as significant. Still, he said, inertia changes when there is a catalyst, and changes in tax laws can provide exactly that spark. Read next: Will mutual funds get a second wind… as ETFs? Listed Sundries What do you get when you combine two of the hottest investment themes? S&P Dow Jones has launched five new dividend aristocratic indices with environmental, social and governance (ESG) criteria. The new indices cover developed markets, high yield, global markets, quality income and high yield in the euro area. A new AI-powered ETF is giving value another shot at value by prioritizing intangible assets like intellectual property, brand power, and leadership. That results in an eclectic portfolio with stocks like CVS Health, CVS, + 2.29% FedEx Corp, FDX, + 4.68% and GameStop Corp. GME, -7.28% The Qraft AI-Enhanced US Next Value ETF NVQ, + 1.20% has picked up to just under $ 5 million since its December launch, and charges 75 basis points. It has returned 20.4% so far this year, compared to 11.4% for the S&P 500. Is there an ETF for that? The beans are in their teens, the price of corn is in the air, and the rolling contract for wheat W00, -1.50% is unbeatable. Agricultural products are on the rise, in other words. There may be some good reasons for investors to add exposure to the sector using ETFs. While many investors have exposure to gold or oil, farms are less common, Sal Gilbertie said in a MarketWatch interview. Agriculture does not correlate well with the most widespread asset classes, Gilbertie says, yet it can be an all-weather diversifier as it is so “ubiquitous,” in his words. “It doesn’t matter what the economy is doing, who the president is, what the latest iPhone looks like,” he said. Gilbertie has had a long career in financial services, including creating the first ethanol exchange nearly two decades ago. He founded Teucrium, an ETF company that now manages five funds, because “I couldn’t believe there was no exposure for ordinary people,” who cannot trade commodity futures. A growing human population and a rising middle class make demographic tailwinds unbeatable, he argues. Corn, for example, is used for everything from feeding livestock to feeding humans, making the starch used in products like paper and ink, powering our vehicles, and developing industrial products like adhesives and lubricants.

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Corn futures prices rebounded near breakeven in recent years as the weather remained favorable. But since the end of last year, conditions have changed and prices have risen: Soybeans broke the psychologically important benchmark of $ 13 on Dec. 31 and has not looked back. Bad weather in the southern hemisphere has limited the supply of some commodities and demand has increased as economies begin to reopen. Investors may have missed the most recent rally in corn and other agricultural products, Gilbertie acknowledged. “It’s going to be difficult to have another advantage that big,” he said. Still, he remains true to his belief that “investors need to be mindful of grains. As Peter Lynch said, trade what you know. “Teucrium offers four crop-specific ETFs, tracking prices for corn CORN, + 0.35%, WEAT wheat, -1.68%, SOYB soy, -0.31% and CANE sugar, -0.38%, and one that adds all four TAGS, -0.18% They were the first of their kind, launched more than a decade ago and have assets ranging from $ 183 million, in CORN, to $ 17 million for CANE.

The graphic above comes from Jim Reid of Deutsche Bank Research. It shows that the Bloomberg Agriculture Spot Index rose about 76% year-over-year, the largest annual increase in nearly a decade. That’s a concern as spikes in food prices often lead to social unrest, Reid notes, as in the 2010 Arab Spring uprising.

Weekly Rap Top 5 Winners from Last Week Simplify Volt Cloud and Cybersecurity Disruption ETF VCLO, -2.00% 11.7% Direxion Moonshot Innovators ETF MOON, -3.13% 8.6% Teucrium Wheat Fund WEAT, -1.68% 8.1% Direxion Hydrogen ETF HJEN, – 1.83% 6.9% Invesco Solar ETF TAN, -1.66% 6.7% Source: FactSet, as of close of business Wednesday April 28, excluding ETNs and leveraged products Top 5 losers of the week past iShares MSCI Global Silver Miners ETF SLVP, + 5.26% -5.7% Sprott Gold Miners ETF SGDM, + 4.74% -5.0% iShares MSCI Global Gold Miners ETF RING, + 4.37% -5.0% ETFMG Prime Junior Silver Miners ETF SILJ , + 5.20% -4.7% Global X Silver Miners ETF SIL, + 4.20% -4.5% Source: FactSet, as of close of business Wednesday April 28, excluding ETNs and leveraged products MarketWatch has launched ETF Wrap, a newsletter weekly that gives you everything you need to know about the public sector: new debuts fund, how to use ET F to express an idea of ​​investment, regulations and changes in the industry, inflation ws and performance, and more. Sign up at this link to have it delivered directly to your inbox every Thursday.