Fidelity to Launch International Factor ETFs
Earlier this week, Fidelity filed paperwork to register the launch of two new “factor-based” exchange-traded funds (ETFs) that focus on international stocks with specific characteristics—International High Dividend ETF and International Value ETF—on January 18.
The new ETFs expand to eight Fidelity’s suite of factor, or “smart beta,” ETFs that launched in September 2016. They will carry expense ratios of 0.39%.
Fidelity’s initial factor ETFs have attracted some early adopters, with more than $500 million invested across the six strategies at the time of the announcement.
International High Dividend ETF will track Fidelity’s in-house International High Dividend Index, which is designed to capture the performance of international high-dividend-paying stocks that are expected to continue to pay and grow their dividends. Along with high dividend yields, the stocks included in the index are also required to have low dividend payout ratios (meaning that the amount paid out is a small percentage of a company’s net income) and high dividend growth.
International Value Factor ETF will follow the proprietary Fidelity International Value Factor Index, designed to capture the performance of international stocks exhibiting attractive valuations as determined by the firm’s quantitative analysts. These stocks must rate well on a number of “value” factors, including high free-cash-flow yield (cash flow divided by the share price), low enterprise value (a company’s total value) to earnings, low price to tangible book value (a company’s net asset value), and low price to future earnings.
The move marks Fidelity’s latest effort to employ its strong reputation for active management expertise with the soaring popularity of exchange-traded funds and the increasing interest in “factor-based” investing (a market that Vanguard is also actively exploring). Time will tell how interested investors are in these new offerings.
Tax-Bill Implications for 529 Plan Investors
529 plans returned to the headlines thanks to the Tax Cuts and Jobs Act of 2017 signed in to law in December. Account owners are now able to use up to $10,000 per beneficiary, per year from their 529 plans for private elementary or secondary school tuition. Previously, these accounts were only intended for college- and university-related expenses.
As a refresher, 529 plans are fantastic, tax-advantaged vehicles designed specifically for investors helping a child, relative, friend or even themselves save for tuition and expenses related to higher education and, now, private K–12 schooling. Plans are sponsored by states, generally in partnership with a mutual fund company or institute of learning, and usually offer either a number of investment options to choose among or a means of locking in a tuition rate.
Anyone can set up a 529 plan for a designated beneficiary, and all withdrawals that go towards “qualified educational expenses” (which include tuition, room and board, books, a computer and peripherals, and even internet access) are exempt from federal and (usually) state taxes.
There are no income restrictions and no limit to the number of plans you can enter into, though withdrawals above and beyond the costs of those qualified education expenses (or non-qualified withdrawals in general) are subject to federal and state income tax, as well as a 10% penalty.
Plus, with the gift tax exemption raised to $15,000 in 2018 (up from $14,000), by taking advantage of the lump-sum contribution exemption built into 529 plans’ gifting feature, you can make a one-time contribution of up to $75,000 ($150,000 if married filing jointly) for a beneficiary and choose to treat the deposit as if it was made over a five-year period for gift tax purposes.
Will State Tax Deductions Apply?
529 plans are typically administered by state agencies, with the Federal government allowing the money to grow tax-free. And, in 35 states, savers are further encouraged to put money away with deductions or credit toward their state taxes, too.
While we believe the changes are a net positive for those investing for a loved one’s education expenses, the rapidity with which the plan was pushed through Congress leaves state governments in a position of having to reexamine and possibly adapt their own laws and 529 plan rules to catch up with the revamped federal code. So far, it’s unclear how state legislatures will respond to this expansion of eligible education expenses. If the new law results in more new sign-ups and additional contributions, state governments may take a real hit with the increased tax breaks and the higher cost of administering a greater number of accounts.
Only about 10% of students attend private schools, but that still adds up to many millions of dollars in revenue shortfalls at the state level. Nebraska State Treasurer Don Stenberg has already suggested postponing the tax benefits on private K–12 tuition until 2020 to avoid adverse fiscal impact on his state’s budget. Meanwhile, Iowa State Treasurer Michael Fitzgerald has urged families to avoid using 529 plans to pay for private school until the state has a chance to amend its laws.
Currently, 29 states and the District of Columbia offer a tax credit or deduction for contributions to their state’s 529 plans. Arizona, Kansas, Missouri, Montana and Pennsylvania offer tax parity, meaning you can invest in any state’s plan and get that state’s tax benefits. If you live in one of these states, it’s probably worth checking to see how your state treasury plans to respond to the new laws before making any withdrawals for private K–12 expenses.
Some of the states that offer deductions have language in their tax codes explicitly defining 529 plans as “college savings” accounts. And many have yet to address potential divergences between federal and state laws, and whether investment gains are taxable where such discrepancies occur.
It’s probably in your best interests to take a wait-and-see approach until states figure out how they’re going to respond. Better yet, consult a tax professional before taking any action. By racing to withdraw money now to pay for private school before your state updates its tax code, you may be at risk of repaying a state deduction you’ve already received or end up having to pay taxes on investment gains, essentially losing most if not all of the favorable tax treatment of the account.
If you are interested in taking advantage of this revision to the tax code, it may be worth opening a separate 529 account for anticipated K–12 expenses. This way you can more easily manage the two different time horizons with distinct investment portfolios. We recommend consulting a trusted tax or financial planning professional prior to taking action.
In an upcoming issue, we’ll look at how the tax bill affects people subject to the Alternative Minimum Tax.
About Adviser Investments
Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the fifth consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2017. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015 and 2016.
For more information, please visit www.adviserinvestments.com or call 800-492-6868.
Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance.
Editors at the Financial Times bestowed “elite” status on 300 firms in the U.S., as determined by assets under management, asset growth, longevity, compliance record, industry certifications and online accessibility.
© 2018 Adviser Investments, LLC. All Rights Reserved.