The Xchange Blog

The Tax Code Has Changed: What Happens Next?

If there’s one reason the Street reacted so enthusiastically to the results of the 2016 election, it was the promise of an overhaul of the American tax system that would reduce the corporate tax rate. The market went into overdrive once that campaign pledge became plausible policy.

While a lot has happened in the first year of the Trump administration, the singular hope for a new tax code acted as an engine that drove the market past troubled political waters. However, now that the hastily constructed and hotly contested bill is law, investors, tax payers, and pretty much everyone else are scratching their heads about what the changes will mean in terms of cold, hard cash.

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For a broad sense of how the tax code changes might play out on corporate ledgers, we can look to the last time business got a tax break. Back in 2004, the George W. Bush administration shepherded a bill to declare a tax holiday intended to lure billions in foreign profits back to the U.S. at a discounted tax rate of 5.25 percent.

In all, 843 companies took advantage of the break, bringing back a total of $312 billion in (prorated) taxable revenue. Notable participants included Pfizer, Johnson & Johnson, and IBM. 

Now that the tax rate is set to run at a discounted rate of 21 percent — which is similarly targeted at repatriating offshore profits — investors might want to look at sectors containing companies with offshore profits that also might be looking to improve their balance metrics or lower soaring P/E ratios. Some sector-wide ETFs, like the Direxion Daily Technology Bull 3X Shares ETF or the Daily Healthcare Bull 3X Shares ETF, hold companies with the most offshore capital eligible for repatriation.

The tech and biotech sectors had a great ride in 2017. Will the repatriation of overseas cash help them continue upward?


Data Range: 1/1/2017 – 12/31/2017. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. One cannot directly invest in an index.



Data Range: 1/1/2017 – 12/31/2017. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. One cannot directly invest in an index.

 

Stocks Get A Raise 

Returning to the 2004 repatriation scheme, it’s important to ask where those offshore funds went. The stated intent of the holiday was to fuel investment in domestic hiring and job training. However, companies directed nearly all of this money towards share buybacks—even though such repurchasing was explicitly prohibited by Congress in the language of the bill.

The overriding goal at that time was to make company equity as appealing as possible with the newly freed funds. Share repurchasing programs and dividend distributions are often simple ways to turn excess capital into more valuable or appealing equity, and investors can expect companies to invest in the promise of stronger demand for their corporate equity.

With that in mind, investors could anticipate sectors known for dividends to increase or at least hold steady with those distributions. One way to approach that is to look at high dividend sector ETFs, like the Direxion Daily Utilities Bull 3X ETF as investors look to capture those quarterly payments.



Data Range: 5/1/2017 – 12/31/2017. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. One cannot directly invest in an index.

 

It’s (Not) The Economy, Stupid

While the market stands to gain in the short term, most of the actual effects for the new tax policy are uncertain. While the hope is that the tax cuts aimed at corporations and the wealthy will inject the capital to create jobs, there is no strong evidence that this will hold true.

While the market may benefit, but there may be losers to the new tax law. You might expect a rise from the Direxion Daily MSCI Real Estate Bear 3X Shares ETF, as a decrease in the amount individuals can deduct for interest on home equity loans will generally drive down demand among homebuyers. Those anticipating  a rally in transportation and industrials may have to wait, as hopes for infrastructure spending diminish with a narrower tax base and no provisions to direct any repatriated money toward public works projects.



Data Range: 1/1/2017 – 12/31/2017. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. One cannot directly invest in an index.

 

The immediate benefits of the tax bill are likely to cause excitement on the Street, but traders should stay on their toes and avoid getting caught up in the excitement. With a $1.4 trillion price tag, the tax plan has a long way to go before it pays for itself. If it can.

 

Related Leveraged ETFs:

 


Performance (as of 12/31/2017)

      1M % 3M % YTD % 1Y % 3Y % 5Y % S/I % Inception
Expense Ratio
(Gross / Net %) *
TECL Daily Technology Bull 3X Shares NAV 0.62 25.12 124.98 124.98 47.77 55.97 49.32 12/17/2008 1.10 / 1.08
Market Close 0.86 25.34 124.83 124.83 47.77 55.92 49.39
TECS Daily Technology Bull 3X Shares NAV -1.42 -22.42 -60.70 -60.70 -46.55 -48.26 -52.68 12/17/2008 1.29 / 1.10
Market Close -1.71 -22.73 -60.81 -60.81 -46.54 -48.32 -52.70
CURE Daily Healthcare Bull 3X Shares NAV -2.54 2.55 69.25 69.25 14.56 48.00 41.47 06/15/2011 1.11 / 1.09
Market Close -2.44 2.63 69.33 69.33 14.51 48.20 41.45
UTSL Daily Utilities Bull 3X Shares NAV -18.00 -1.43 10.04         05/03/2017 1.02 / 1.01
Market Close -17.60 -4.25 10.84        
DRN Daily MSCI Real Estate Bull 3X Shares NAV -1.28 2.54 7.72 7.72 5.30 18.90 36.92 07/16/2009 1.13 / 1.09
Market Close -1.28 2.59 7.57 7.57 5.35 18.93 36.81
DRV Daily MSCI Real Estate Bear 3X Shares NAV 0.48 -4.12 -17.22 -17.22 -26.16 -33.85 -52.75 07/16/2009 1.54 / 1.10
Market Close 0.38 -4.03 -17.10 -17.10 -26.16 -33.87 -52.76

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95%. The Fund’s Adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with the Fund, under which Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September 1, 2018, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s daily net assets other than the following: taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses. If these expenses were included, the expense ratio would be higher.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxioninvestments.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment. The Direxion Shares ETFs are not designed to track their respective underlying indices over a period of time longer than one day.

Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to investment in securities of a Fund’s underlying index, for the Bull Funds, Daily Index Correlation Risk and Other Investment Companies (including ETFs) Risk, and for the Bear Funds, Daily Inverse Index Correlation Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.