The U.S. Corporate Tax Bite and Sector ETF Performance
25 January 2010 at 3:17 pm by Gary Gordon
Last year, I examined effective tax rates in different countries as they might relate to ETF returns. This year, I wanted to take a look at how the actual tax bite on different industries might influence ETF performance.
While U.S. companies often argue that the 35% corporate tax bracket is too high, Bloomberg BusinessWeek cites data from the Analyst’s Accounting Observer that includes incentives, credits and breaks.
It follows that each of the 10 major economic segments have different tax obligations. Might stock asset performance be affected?
| Actual Tax Percentages By Industry and 5-Year ETF Performance | ||||||||
| Tax Percentage | 5-Year Performance (12/31/09) | |||||||
| Health Care (SPDR Select Health XLV) | 22.7% | 10.8% | ||||||
| Tech (SPDR Select Tech XLK) | 25.9% | 13.0% | ||||||
| Telecom (iShares DJ Telecom IYZ) | 27.9% | -9.0% | ||||||
| Utilities (SPDR Select Utilities XLU) | 28.1% | 31.1% | ||||||
| Industrials (SPDR Select Industrials XLI) | 28.9% | -2.7% | ||||||
| Financials (SPDR Select Financials XLF) | 29.2% | -46.3% | ||||||
| Energy (SPDR Select Energy XLE) | 29.5% | 66.4% | ||||||
| Materials (SPDR Select Materials (XLB) | 29.7% | 21.8% | ||||||
| Con Staples (SPDR Select Staples XLP) | 30.2% | 27.4% | ||||||
| Consumer Discr (SPDR Select Con Dis XLY) | 31.3% | -11.0% | ||||||
Taxes, shmaxes? At least for a 5-year horizon, one can’t make the case that the higher taxes levied on energy and materials companies hurt shareholders. (Well, at least not in a relative sense.)
Of course, 5 years may not be a long enough time. And one has to strip financial companies out of the picture entirely, since the global credit collapse makes financials look like “dot-com investing” circa 2000-2002.
Nevertheless, the only inferences that I might draw are the following:
(1) Consider SPDR Utilities (XLU). The income is higher than 10-year treasury bonds. What’s more, XLU is a relatively low risk way to pursue total return with a high probability of capital appreciation over time. Even the tax conscious would prefer 4th of 10 in the industry list.
(2) Recognize SPDR Select Technology (XLK) for its potential versus other industry segments. Healthcare companies are taxed nearly 1/3 less than consumer-related corporations, but almost any form of “health reform” legislation may change the face of health care corporation taxation. That leaves “tech” as the least likely to be over-regulated and over-charged. Equally important, if you had to put your finger on a single area where the U.S. can still lead the world… yeah, it’d be in technology.
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Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.
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