Qualify for Tax-Advantaged Qualified Dividends With This New ETF

Not all new ETFs have the benefit of a good time, but at a time when advisors and investors are scrambling to find income, the Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI) could prove to be one 2020’s best-timed new ETFs.

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.”

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.

Common equity payouts “are the same as standard federal income tax rates or 10% to 37% for the most recent tax year. By comparison, qualified dividends are taxed as capital gains at rates of 20%, 15%, or 0% depending on the tax bracket. Because of this discrepancy in rate, the difference between ordinary vs. qualified dividends can be substantial when it comes time to pay taxes,” according to Investopedia.

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Underscoring the good timing of PQDI’s debut is its exposure to preferred stocks, a beloved high-yield asset class that income investors often flock to when interest rates are low as they are today.

Like common stock, preferred stock is issued by a company and traded on an exchange. Preferred stock prices can fluctuate, but most of the returns from preferred stock come from dividends. Unlike common stock, preferred stock dividends are predetermined and paid at regular intervals. These dividends are paid in full before any dividends are released to common stockholders.

Lower correlations to common stocks and traditional fixed income investments also make preferreds attractive portfolio diversification tools.

Preferreds are conducive to the PQDI strategy because they payouts from this asset class are qualified, making preferreds a viable alternative to taxable bond strategies, income from which is taxed at the ordinary rate.

PQDI has 38 holdings and an annual expense ratio of 0.60% per year, or $60 on a $10,000 investment.

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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.