20 Nov PROPOSED SECURITY TRANSACTION TAX IS GREATER THAN MANY ETF FEES
Bloomberg writes over 1000 ETFs have been closed with 97 closing thus far in 2019. The reason…small size and the lack of fees. It is generally accepted an ETF has to broach $50 million to become solvent. According to Bloomberg, the average ETF charges 0.5% in management fees. The largest ETFs charge about 0.2% in management fees.
Several leading Democratic presidential candidates are campaigning for a securities transaction tax amounting to 0.5% on equity trades to fund their progressive agenda. Fixed income trades would be charged 0.25%.
Wow! As widely discussed passive ETFs have more assets than actively managed funds partially the result of lower fees and indexing. According to the SEC 90% of equity trading volume is now the result of passive investing and algorithmic trading. If a transaction tax becomes policy, the impact on the markets could be exponential.
Speaking of exponential, according to Bloomberg technology is trading at 125% of historical valuation, eclipsing its previous 2000 peak. On the other hand, energy and the financials are trading at 18% and 38% of their norm valuations. As percentage of the S & P oil is trading at a record low 3.9% of the S & P capitalization, down from 12% in 2012. Bloomberg reports technology is at a record high 27%.
I will argue this huge disparity is partially the result of passive and algorithmic trading which has created an unbalanced market where according to FINRA price discovery could be absent.
It is not a question as to if this imbalance will change but it is more of question as to when and how much damage such a change will inflict.
Commenting about yesterday’s market activity, equity markets were bifurcated with the NASDAQ rising about 0.25% and the Dow falling about 0.40%. Treasuries were up about ¾ of point.
Last night the foreign markets were down. London was down 1.15%, Paris down 0.43% and Frankfurt down 0.77%. China was down 0.78%, Japan down 0.62% and Hang Sang down 0.75%.
The Dow should open moderately lower on trade tensions following the passage of legislation supporting Hong Kong protestors. The 10-year is up 10/32 to yield 1.76%.