With Election Day right around the corner and regime change a possibility in the nation’s capital a possibility, advisors and investors need to consider potential changes to the tax code and that could put the spotlight on tax-advantaged strategies, such as the Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI).
PQDI “seeks to provide current income. Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying securities at the time of purchase,” according to Principal. “Such securities include, without limitation, preferred securities and capital securities of U.S. and non-U.S. issuers. The fund invests significantly in securities that, at the time of issuance, are eligible to pay dividends that qualify for favorable U.S. federal income tax treatment.”
PQDI could become all the more important if former Vice President Joe Biden wins the White House in November.
“Among Democratic presidential nominee Joe Biden’s many tax proposals, one that has gotten less attention would modify how traditional retirement accounts are treated in the tax code,” according to the Tax Foundation. “This proposal would shift some of the benefits of tax deferral in traditional retirement accounts toward lower- and middle-income earners with the goal of encouraging additional saving by those taxpayers.”
A simple way of looking at the rookie ETF is that its management is looking for the combination of income and tax advantages, which can be accrued via qualified dividend income (QDI). Many investors are familiar with common stock dividends, but qualified dividends are easy to understand, too.
“Preferred and capital securities have historically delivered attractive risk-adjusted returns, and active management can potentially enhance returns by selecting higher-quality and improving credits and avoiding speculative risks,” according to Principal. “Investors are seeking new innovative solutions to boost after-tax income, especially as interest rates remain low. PQDI exposure to preferred securities aims to provide tax-advantaged income as U.S. investors build and distribute wealth.”
PQDI is also relevant today because qualified dividends aren’t necessarily a hot-button political issue. However, a would be Biden Administration is likely to consider some tax code changes that could increase the allure of PQDI.
“Under current law, traditional retirement accounts allow taxpayers to defer paying tax on contributions, deducting the contribution when calculating adjusted gross income (AGI),” notes the Tax Foundation. “Taxpayers can let the contribution earn returns when invested, eventually paying tax on the distributions when the funds are withdrawn.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.