Industry Updates

Investors pile into S&P 500 ETFs as Biden tax proposals offer entry point

Biden's new proposals would see capital gains tax double for those earning more than $1m

Jamie Gordon

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S&P 500 ETFs in Europe were among the top inflows last week as US President Joe Biden’s capital gains tax plans caused a dip in US equities. 

According to data from Ultumus, the Vanguard S&P 500 UCITS ETF (VUSA) saw the highest inflows across all European-listed ETFs with $259m inflows in the week to 23 April.

Elsewhere, the Xtrackers S&P 500 Swap UCITS ETF (D5BM), Amundi S&P 500 UCITS ETF (500) and Invesco S&P 500 UCITS ETF (SPXS) gathered $146m, $145m and $101m new assets, respectively.

Equal weight ETF inflows surge as investors bet on cyclical shift

This came after a Bloomberg report noted individuals earning over $1m would see their capital gains rate rise by 20% from current levels if Biden’s new tax proposals came into force.

Steen Jakobsen, CIO at Saxo Bank, said: “A new proposal from Biden would tax capital gains at a rate as high as 39.6% to help pay for the social and infrastructure spending for those earning $1 million or more.

“Including the 3.8% capital gains tax to pay for Obamacare, this would take the tax rate on capital gains to higher than the highest income tax bracket.” 

Wall Street investors were immediately spooked as the tax proposals were tabled last Thursday with the S&P 500 dropping 0.9% to make it the worst session of trading in around a month for the index.

Though expectations of corporate and capital gains tax hikes should have been somewhat priced in by investors from the point that a Biden presidency seemed likely, the starkness of the capital gains rate doubling likely gave onlookers a shock.

The Chicago Board of Options Exchange’s Volatility index (VIX) also spiked to its highest level in a month highlighting the initial fear instilled in investors as Biden laid out his plans.

“Certainly, this plan and the earlier proposed increase for corporate taxes at minimum present hurdles for the kind of equity market gains we have seen in the wake of the Covid outbreak,” Jakobsen added.

Despite this, investors appeared to choose the COVID-19 recovery narrative over risks posed by further tax headwinds and bought the dip on S&P 500 strategies as index trackers licked their wounds.

As well as rebounding strongly from the peak of pandemic volatility, the US market will continue to be a mainstay for investors over the coming months, as intensifying COVID-19 second waves in emerging market economies remind them of America’s relative stability.

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