How rich Americans are limiting their tax bill

+ what you need to know about no-fee brokerages & value investing rush

Issue #9. 

Hope you had another financially successful week!  In this week’s edition of the Gist, we’ll dig into some ways that rich Americans limit their tax bill, take a look at value ETFs and mutual funds, and discuss zero-commission brokerages (hint: there are quite a few now, but are they really free?).

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So here are your questions for today’s edition: 

  1. Back in the days, it was only Robinhood that offered 0-dollar stock trades. Charles Schwab dropped the bomb this week. Who are the brokers offering no-commission stock trades? Should I switch to one of those?

  2. Recently their has been a lot of talk about the potential for value stocks in comparison to growth stocks. What are some popular value ETFs and mutual funds that I should know about?

  3. How do rich people minimize their tax bills?

Let’s give you the summary first.

Summary

  1. There are quite a few brokers offering no-commission trades now. Besides Charles Schwab, here are some others: E-Trade, Firstrade, Interactive Brokers (“Lite” version coming out soon), M1 Finance, Public, Stocktwits trading app, Robinhood, TD Ameritrade, Webull and WiseBanyan (no-fee robo advisor).

  2. The resurgence of value investing is the flavor of the month. To be truthful, value investing has been neglected at the expense of growth stocks and funds. Here are some of the most popular value mutual funds and ETFs.

  3. There are a range of strategies that some people use to limit their tax bill, ranging from early exercise (83b), utilizing Investment Credit Lines (ICLs) to delay capital gains realization when purchasing property, exploring qualified opportunity zone (QOZ) investments to delay or avoid capital gains, and whenever possible, certifying Qualified Small Business Stock (QSBS) treatment to eliminate capital gains completely. We’ll talk about QOZ in the deep dive.

Deep Dive

  1. There are at least 10 brokers and investment platforms now offering commission-free trading. But here are the things you should know about ‘free trading’:

    • Commission-free trading could tempt some investors to trade more frequently, which could prove detrimental to their returns through potentially higher tax bills on short-term holdings.

    • Brokerages could also offset some of the losses from commissions by increasing charges that are less transparent to investors or dipping into their pockets in other ways (e.g., consumers may earn less on the cash in their brokerage accounts).

    • It probably doesn’t pay off for investors to switch brokers solely because of commissions. Most online brokerages are likely to offer commission-free trading at some point, analysts say, so it may make sense to wait.

    When an investor buys or sells a stock, she or he usually pays more than the stock’s prevailing price. That’s because the trading firms that handle the trades are compensated on the difference between the bid/ask price. To make up for revenue lost from commissions, brokerages could route trades in a way that leads to wider spreads (e.g., that’s how Robinhood makes money today).

  2. So you’re interested in value ETFs and mutual funds? Keep in mind, not all value funds are created equal. Some are focused on small cap, some on S&P 500, and some on international. Before investing in any of those, do your due diligence and understand the underlying risks.

    The top value ETFs, ranked by net assets are:

    • iShares Russell 1000 Value ETF (IWD)

    • Vanguard Value Index Fund ETF Shares (VTV)

    • iShares S&P 500 Value ETF (IVE)

    • Vanguard Small-Cap Value Index Fund ETF Shares (VBR)

    • iShares Russell Mid-Cap Value ETF (IWS)

    This resurgence of value investing could be just a market correction around the value segment which has been neglected over the last few years of growth. Here are some interesting things to note about the value segment:

    • Value outperformed higher-growth momentum stocks in September.

    • Divergence in performance between value and growth hit widest level in nearly 10 years.

    • PE-ratio spreads between value and growth are at widest level since 2001.

    • Growth stocks are suffering from overcrowding.

  3. There are many ways to limit your tax bills if your taxes are running high. The one option that’s garnering a lot of interest is investing in Qualified Opportunity Zones (QOZ), created by the 2017 Tax Cuts and Jobs Act. 

    These zones are designed to spur economic development and job creation in distressed communities throughout the country by providing tax benefits to investors who invest eligible capital into these communities. Taxpayers may defer tax on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund and meeting other requirements.

    You can find the list of QOZs here—download the Excel file and view all opportunities available. For your information, you don’t need to reside close to where QOZ is located if you’d like to invest.

That’s it for this edition.  What would you like to hear about in our next Gist?  Ask us a question here.

The AskFinny Team