Loading...
Symbols:
Authors:

Investing in ETFs to Accommodate Change

by: Thomas Smicklas June 02, 2008 | about stocks: ADRE / APL / CPNO / EEP / EPD / ETINX / ETP / LINE / MMP / NRGY / PAA / TOK / VGK / VPL / VV    

Thomas Smicklas

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Individual investors should always look ahead to probable tax consequences of investments. Surprisingly, little attention has been paid to two significant tax issues should an Obama victory occur in November, especially if a super majority of Democrats are inhabiting the House and Senate.

First, it is highly likely that brokerages will be required to report the cost basis of all securities transactions to the IRS. Now, only sales of securities are reported. Investors can minimize this new tax wrinkle by selling securities that will be hit hard by front/back government access to security records beginning in 2009 before December 31st, 2008, and then shift assets into tax efficient index funds, ETFs and tax-managed funds in taxable accounts.

I would go so far as to recommend that individual stock purchases be minimized or eliminated completely unless they are tax advantaged in some way (such as with Master Limited Partnerships).  Unfortunately, stock speculation risk taking will be taxed up the ying-yang and may not be worth the time or trouble after Uncle Sam gets his cut, if future tax plans become a reality.

Second, Obama's current position is a 25% long term capital gain and dividend tax rate, with ordinary income tax rates as high as 39.6%, The estate tax would qualify for a $3.5m exemption and a 45% top taxable rate afterwards.

As for other tax schemes to fund mammoth government undertakings, who knows? With talk of John McCain being a Bush third term by Democrats, is it possible that an Obama victory will result in a Jimmy Carter second term? Investors hope not.

For non-taxable accounts, which almost always are designed towards a conservative bias, individual stocks, funds that trade frequently (such as small-cap growth funds) and otherwise taxable, dividend-rich securities are advisable.

According to FORBES (June 2, 2008), the following index funds and ETFs are the least expensive in their respective sectors. They will likely outperform comparitive objective managed funds. The following may fit your taxable account(s):

  • VANGUARD LARGE-CAP INDEX ETF (VV) (US Equity) expenses $0.07
  • E-TRADE INTERNATIONAL INDEX (ETINX) (International) expenses $0.09
  • VANGUARD EUROPEAN STOCK INDEX-INV (VGK) (Europe) expenses $0.22
  • VANGUARD PACIFIC STOCK INDEX-INV (VPL) (Asia) expenses $0.22
  • ISHARES MSCI KOKUSAI INDEX (TOK) (Global) expenses $0.25
  • BLDRS EMERGING MARKETS 50 ADR INDEX (ADRE) (Emerging Markets) expenses $0.30

Managed ETFs will play an increasingly large role in adapting to tax policy and what some would regard as the scheme to redistribute wealth are hatched by governmental entities at all levels.

The recently launched PowerShares Global Diversified ETF Portfolio ETFs (of ETFS) have received notoriety from myself and others. This type of ETF may be the investment vehicle of the future for many. Look them up at www.PowerShares.com (PCA, PAO, PTO). I like PTO.

Regarding tax-advantaged securities, I have long advocated pipeline MLPs as an excellent investment vehicle. A current Forbes article (dated above) agrees. Although my selections are a bit different, I won't quarrel with the list presented by Gabriel Hammond, a young man with a pedigree resume. Here are his picks:

  • ATLAS PIPELINE PARTNERS (APL) yield 8.6%
  • COPANO ENERGY (CPNO) yield 5.0%
  • ENBRIDGE ENERGY PARTNERS (EEP) yield 7.5%
  • ENERGY TRANSFER PARTNERS (ETP) yield 7.3%
  • ENTERPRISE PRODUCTS PARTNERS (EPD) yield 6.1%
  • INERGY (NRGY) yield 8.5%
  • LINN ENERGY (LINE) yield 10.9%
  • MAGELLAN MIDSTREAM HOLDINGS (MMP) yield 4.8%
  • PLAINS ALL-AMERICAN PIPELINE (PAA) yield 7.2%

Planning ahead is smart. Planning ahead with research and a conviction to succeed in spite of the barriers government installs to take away your hard-earned money is divine.

Related Articles

This article has 11 comments:

  •  
    Jun 02 07:36 AM
    Regardless of who gets elected, since all are largely liberals, this is a very very likely scenario. We may also see the reductions of dividends in favor of buy backs which might create buying opportunities in formerly high div paying stocks that get sold off in anticipation of, or the result of such a reduction. We may have witnessed the end of a very good period of time to hold dividend paying stocks in taxable accounts.

    For those interested in LPs there is an association of publicly traded partnerships (a lobbying group-shocker!) that publishes a pretty comprehensive list of MLPs etc.

    Best to all.
    Reply
  •  
    Jun 02 08:18 AM
    No hyperlink to the Forbes article.
    Reply
  •  
    Jun 02 08:37 AM
    What politicians promise during campaigns, and what they are actually able to deliver are actually quite different, and investing on that speculation is usually a bad idea.

    www.newsweek.com/id/13...
    Reply
  •  
    Jun 02 08:47 AM
    "With talk of John McCain being a Bush third term by Democrats, is it possible that an Obama victory will result in a Jimmy Carter second term? Investors hope not."

    I'm really not sure what you are talking about. The capital gains tax was raised by the 1969 and 1976 Tax Reform Acts which were signed by Presidents Nixon and Ford respectively. The next pieces of legislation dealing with capital gains were signed by Reagan.

    What piece of legislation did Carter pass dealing with taxes?
    Reply
  •  
    Jun 02 10:52 AM
    Sorry, but I do not know what your point is in the first 3 paragraphs. Are you saying that the majority of tax payers under report their capital gains and cheat the government? I can't figure out what the problem would be if brokerage houses reported costs as well as sales data. I must be missing something. thanks for your help
    Reply
  •  
    Jun 02 01:30 PM
    What are you saying??? Are you suggesting that the IRS..which can get a transaction record from your brokerage faster that one might say..What the hell is this article about??" will be more able to track down discrepencies?? Please tell us something useful.....this is just more Alpha garbage..getting to the point where 1 out of 10 articles is worthwhile.
    Reply
  •  
    Jun 02 01:45 PM
    I am saying that investor's should be aware of the rules and extent of taxation before making a move in their portfolio. The tax consequences of selling parts of an investment bought over different periods of time would likeky be taken out of the decision making process of the investor if inronclad lists were provided the IRS.

    That is one of the points, along with some ideas for coping with increased taxation.

    Still driving your GEO, realist?

    Reply
  •  
    Jun 02 09:06 PM
    No need to buy oil ETF's and all that evil speculation... just buy PBR (Petrobrazil) ... it performs better than any oil ETF... and it will have an amazing earnings announcement this coming quarter, at the novel APRIL and MAY record crude price levels... I am buying another 20,000 shares tommorrow... it always drops about 10% before earnings, then goes up about 30% right into earnings... as the prior quarter price of crude reflects novel amazing earnings for such a large company... this quarter will be astonishing for such a huge company... PBR is bigger than any Oil ETF, and though USO (ETF) has doubled in value in one year, PBR had quadrupled in value... and it pays a dividend to boot... so no need to even speculate with evil ETF's just buy PBR ... read about it... I have done well ... see also NE (sells oil platforms to PBR) also check out STR for a clear US based company success... read about STR (QUESTAR) and NXY (Nexen canadian oil exploration, drill, service, etc)... and check SWN to be added to the S&P today, which should give it a big pop...you will be glad you did... warmest regards ... The STOCK ACCUMULATOR
    Reply
  •  
    Jun 02 10:46 PM
    It seems to me that the US citizen needs a fresh vision leading what may be a declining empire. The currently extremely wealthy must recognize that they are indebted to the subservient cheap laborers that serve them in restaurants, collect their refuse and otherwise provide for a comfortable lifestyle...at the beckon call of the Bush's and their ilk. It is time to recognize labor for its worth and to provide all members of the USA community, who contribute to the national benefit, a truly just wage and benefits. Electing Obama is our only hope for progress toward an egalitarian society.
    Reply
  •  
    Jun 04 02:11 AM
    I plan to vote for BarackO too. But not so he can steal my money to give to your cherished underprivileged people (sitting on their couchs with their hands out). The guy will be a disaster. You think capital moved to BRIC before, wait until 2009. BarackO has my vote for 2 reasons: he might bring a fresh look at our insane middle east policy; and I have all of my wealth invested overseas (except for SXL and OKS), so I don't really mind him and the other good Democrats screwing the American economy.


    On Jun 02 10:46 PM Is All Well? wrote:

    > It seems to me that the US citizen needs a fresh vision leading what
    > may be a declining empire. The currently extremely wealthy must recognize
    > that they are indebted to the subservient cheap laborers that serve
    > them in restaurants, collect their refuse and otherwise provide for
    > a comfortable lifestyle...at the beckon call of the Bush's and their
    > ilk. It is time to recognize labor for its worth and to provide
    > all members of the USA community, who contribute to the national
    > benefit, a truly just wage and benefits. Electing Obama is our only
    > hope for progress toward an egalitarian society.
    Reply
  •  
    Jul 09 11:13 AM
    I can't tell you how tired I get of denominating working poor as people "on couches with their hand out". It seems to me that the oil companies, Halliburton, KBR, financials, CEO's, defense contractors, drug companies, etc. are the ones not only with their hands out, but the ones getting their hands stuffed with money while a good portion of the US cheers. You pick their pocket and they cheer for you. Nice work if you can get it and you can get it if you spend enough on lobbyists and publicists.
    Reply
More Comments on CPNO ยป
More by Thomas Smicklas

Investment Resources
Money Management 

Research 

Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Oil & Gas Transport 

Alternative Energy 

Coal 

Ethanol