On this week’s episode of ETF Prime, host Nate Geraci is joined by ETF Trends’ CIO and Director of Research Dave Nadig, who comments on a recent Senate Finance Committee proposal to close the ETF tax “loophole.” He’s also on hand to field a variety of ETF-related questions from Twitter.

Additionally, GraniteShares’ Will Rhind outlines the investment case for gold and broad commodities. And, finally, Sparkline Capital’s Kai Wu puts focus on the Intangible Value ETF (ITAN).

Getting back to these loopholes, the Senate Finance Committee chair stated in a proposal that he wants to “Close loopholes that allow wealthy investors in mega-corporations to use passthrough entities, primarily partnerships, to avoid paying their fair share of taxes.” This proposal would end tax deferrals related to ETFs. 

Making sense of this and offering his own opinion on it, Nadig explains that the reason ETFs get to defer taxes is that, through the creation-redemption mechanism, they are constantly pushing out low-basis securities to the authorized participant community, which allows them to reset the average basis of any position higher and higher. In practice, when it comes time to make a capital gains distribution, most ETFs don’t actually have capital gains on their books to distribute, as the basis keeps climbing.

Not a Tax Dodge

“It’s not a tax dodge because, as an individual investor, you’re still going to pay the full capital gain,” Nadig notes. “But, you’re just going to pay it when you choose to sell it at some point in the future. Not when it just gets handed to you as a rebalance, thus jumping up the cost basis and causing all the headaches we know you’d get from mutual funds every time you get a distribution.”

With this proposal, the idea is to effectively eliminate the ability to push out those low-basis shares and effectively raise the basis. Nadig can see some of the best intentions behind this. However, the problem is that the people not benefiting are not the rich investors with family trusts, but average investors. Nadig then explains some of the reasons why this is coming up now, as it’s certainly something to keep track of.

Later in the show, Will Rhind joins in. He’s a founder and CEO of GraniteShares, which currently offers five ETFs, including several commodity-focused ETFs, with over $1.5 billion invested. He and Geraci cover two topics — firstly, what has been causing gold to be so flat, and whether or not crypto’s presence is partly to blame. The other topic is broad-based commodities, which have gotten a lot of run this year due to inflation picking up and commodities being a good place to hide or hedge.

Closing out the episode is Kai Wu, the founder and CIO of Sparkline Capital, a new ETF entrant. Wu breaks down the Sparkline Intangible Value ETF (ITAN), an actively managed fund. Based on the ideas presented, Wu says that value investing isn’t dead, but it has evolved. The old ways of measuring companies’ intrinsic values do not work anymore, which has contributed to over a decade of value underperformance. However, Wu does believe that there’s a better way to capture the true value of companies, which includes intangible value.

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