ETF Tax Advantages over Mutual Funds

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If a mutual fund or ETF holds securities that have appreciated in value, and sells them for any reason, they will create a capital gain. However, due to the structural differences in the way the shares are created, an ETF fund can avoid recognizing capital gains on trading profits because they can avoid the outright selling of holdings triggering a capital gain that would have to be distributed.

Mutual funds and ETFs risk generating tax bills for investors whenever they sell stocks in a fund’s portfolio at a profit. Investors can be liable for taxes on those capital gains even though they themselves don’t sell their fund shares. Mutual funds are required to pass on capital gains taxes to investors through the life of the investment, but ETFs incur capital gains only upon sales of the ETF.  

When an ETF experiences redemptions, it can hand over a basket of the fund’s underlying securities instead of cash. It can also pick which shares to hand over, picking the shares with the highest cost basis will reduce the greatest embedded capital gains. Because the trade is conducted in-kind, no capital gains are realized.  Although, ETFs don’t shield dividend and interest income from current taxation.

From the perspective of the Internal Revenue Service, the tax treatment of ETFs and mutual funds are the same. Both are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are minimized for the holder of the ETF and the timing on the ultimate tax bill, after the ETF is sold and capital gains tax is incurred, is left up to the the investor.

Leon Cooperman on the Four Reasons for Selling a Stock

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What is your sell discipline?” Okay, and I say. We sell a stock for one of four reasons. The first and of the highest quality reason, is that we bought a stock at X ’cause we thought it was worth X plus 30 or 40 percent, and it goes up 30 percent. Nothing has changed. We sell.

Source: Hurricane Capital – Business Analysis & Investing

Picking High Quality Stocks

Sources of Durable Competitive Advantage

Source:  The Building Blocks of Investing Nirvana

According to Buffett’s Alpha,  Warren Buffett’s outperformance has been generated by investing in cheap, safe, quality stocks.  So how do investors trying to follow the same strategy define “quality”?

One way to define a quality stock is to look for attributes of the business that set it apart from competitors, and allow the business to sustain through the ups and downs of the economic cycle.  High quality stocks are profitable, provide predictable stable cash flows and make investments of capital to set the stage for further growth opportunities.

Each of these traits is attractive in its own right, but combined, they are the proverbial goose that lays the golden egg, enabling a continued cycle of cash generation, which can be reinvested, begetting more cash, which can be reinvested again or returned to shareholders.

 

Why We’re Still Arguing Whether QE Worked 

But proving the efficacy of monetary or fiscal policy can’t easily be accomplished. This is one of the biggest challenges for economics, and why critics sometimes say that economists suffer from physics envy

Source: Why We’re Still Arguing Whether QE Worked – Bloomberg View

An Expert in Valuation Says Uber Is Only Worth $28 Billion, Not $62.5 Billion

 

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It already has a valuation higher than 80 percent of the companies in the S&P 500, and a finance professor at New York University says Uber Technologies Inc. has no more room to run when it comes to market value. According to Aswath Damodaran, a professor who specializes in equity valuation at NYU’s Stern School of Business, Uber is running up against the roadblock that has thwarted many upstart businesses: Profit.

“Disruption is easy but making money off disruption is difficult, and ride sharing companies would be exhibit 1 to back up the proposition,” he wrote in a recent blog post. “While the ride sharing option is here to stay and will continue to grow, ride sharing companies still have not figured out a way to convert ride sharing revenues in profits. In making this statement, though, I am relying on dribs and drabs of information that are coming out of the existing ride sharing companies, almost all of whom are private.”

Source: An Expert in Valuation Says Uber Is Only Worth $28 Billion, Not $62.5 Billion – Bloomberg

Obamacare’s in Trouble as Insurers Tire of Losing Money 

Now, there’s no denying it. The four biggest U.S. health insurers admit they’re each losing hundreds of millions of dollars on their Obamacare plans. Rather than expand coverage, many are pulling out of the exchanges that were set up by the ACA so people can shop for insurance plans, often with the help of government subsidies.

Source: Obamacare’s in Trouble as Insurers Tire of Losing Money – Bloomberg

On Inflation, Prepare for the Unexpected

Inflation levels are low and expected to remain low—but that’s no excuse for not protecting against unexpected moves, according to Meketa Investment Group.The Boston-based consultant advocated for allocations to inflation-protected bonds and real assets to safeguard portfolios against sudden inflation spikes.“Holding assets that do not decline in real value during unexpected inflationary periods enhances the ability of the total portfolio to make payouts while protecting its value on the downside,” the authors wrote. “This diversification reduces the volatility of the total portfolio’s value, even though the inflation-hedging assets may demonstrate considerable volatility when viewed in isolation.”

Source: On Inflation, Prepare for the Unexpected | Chief Investment Officer