How the Closure of a U.S. Tax Loophole May Affect Investor Portfolios

Christoph Frei and Liam Welsh
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Christoph Frei: Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, AB T6G 2G1, Canada
Liam Welsh: Department of Statistical Sciences, University of Toronto, Toronto, ON M5G 1Z5, Canada

JRFM, 2022, vol. 15, issue 5, 1-10

Abstract: In the United States, exchange-traded funds can defer capital gains taxes of their investors by taking advantage of a legal loophole. To quantify the impact of this tax loophole on investor portfolios, we study a rank-dependent expected utility model. We develop an approximation formula for the sensitivity of the optimal investment strategy with respect to changes in the expected asset returns. By applying this approximation formula, we are able to quantitatively estimate how much investor portfolios may change depending on the investment horizon if the tax loophole is closed.

Keywords: portfolio allocation; ETFs; mutual funds; capital gains tax (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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