New Tax-Advantaged Income ETF to Play If Blue Sweep Hits Market

Sanghamitra Saha
·4-min read

With a few days remaining to the U.S. election, many may think that a Blue Sweep will hit the market next month. If you are among those believers, you may want to position your portfolio accordingly. Among many agendas proposed by the Democratic candidate Joe Biden, tax hike is a prominent one.

Biden Wants Tax Hike

Biden’s victory would mean the partial rollback of President Trump’s Tax Cuts and Jobs Act. Notably, Trump’s tax law lowered the corporate tax rate from 35% to 21%, starting 2018. Analysis by the Tax Foundation reveals that Biden’s plan is to hike the corporate tax rate to 28%.

Biden is also proposing to levy a minimum tax rate of 15% — a potentially damaging outcome for some major companies which pay little in taxes. As far as individual taxes are concerned, Biden’s proposals include a top individual tax rate of 39.6%, up from 37%.

He would also expand the 12.4% Social Security payroll tax, per a Wall Street Journal article. Biden's tax plan is intended to generate more revenues needed to pay down the huge debt incurred to fight the recession (read: All About Biden's Tax Plan & Its Impact on the ETF World).

Biden has proposed raising the top tax rate for capital gains for the highest earners to 39.6% from 23.8%, the largest real increase in capital gains rates in history. That rate would apply only to households with income exceeding $1 million, which make up the majority of capital-gains income.

No wonder, such policies would compel investors to shift to the tax-advantaged route. One such option could be the new Rareview Tax Advantaged Income ETF RTAI. The fund hit the market on Oct 21, 2020.

Inside RTAI

The Rareview Tax Advantaged Income ETF looks to offer total return with an emphasis on providing current income, a considerable portion of which will be exempt from federal income taxes. The expense ratio of the product is 1.91%.

Weighted Average Maturity of RTAI is 7.8 years, weighted average modified portfolio duration is 4.6 years, and weighted average leveraged modified portfolio duration is 6.2 years. It holds eight assets in the portfolio.

The fund invests in the municipal bond closed-end funds. Texas takes the top spot with about 10.43% exposure, followed by Illinois (9.62%), California (7.45%) and New York (7.38%).

Nuveen AMT-Free Quality Municipal Income Fund takes about 18.94% of the fund, followed by Nuveen Qual Muni Income Fund (18.66%) and Invesco Value Municipal Income (14.23%).

How Does It Fit in a Portfolio?

Munis are yielding better than treasury bonds. Yield of the 10-year investment-grade AAA-rated muni bond was 0.94% on Oct 23 versus 0.85% offered by the same duration U.S. treasuries. Though coronavirus pandemic and the resultant decline in state tax revenues raises the default risks in muni bonds, “a $3.1 trillion national budget deficit makes the prospect of a federal bailout of states less likely,” per the founder and CEO of Palumbo Wealth Management, as quoted on MarketWatch.

However, as most experts say one should avoid exposure to any single state. Since RTAI has a diversified approach and less state-specific concentration risks, the fund could prove to be a lucrative one.

Plus, no state has defaulted since the Great Depression. “Since 1970, only about $72 billion of the municipal bonds rated by Moody’s Investors Service defaulted, with about $66.5 billion of that from the bankrupted governments of Detroit, Jefferson County, Alabama, and Puerto Rico, according to a December report from investment firm VanEck,” as quoted on Bloomberg.

Any Competition?

The success ahead of the fund is subject to stiff competition. VanEck Vectors AMT-Free Intermediate Municipal Index ETF ITM, VanEck Vectors AMT-Free Long Municipal Index ETF MLN and VanEck Vectors Short High-Yield Municipal Index ETF SHYD are of the funds in the space that may pose risks.

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VanEck Vectors Long Muni ETF (MLN): ETF Research Reports
 
VanEck Vectors Intermediate Muni ETF (ITM): ETF Research Reports
 
VanEck Vectors Short High Yield Muni ETF (SHYD): ETF Research Reports
 
RVTAX ADV INCM (RTAI): ETF Research Reports
 
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