What would you hold "forever" that you will never have to sell?

[LearningMachine]

If you have to eventually sell what you buy, you will have to eventually pay taxes on it.  If long-term capital-gains tax rates go up to be same as short-term gains, and your state also has capital gains taxes on top of fed rates, those taxes could eat as much as 50% of your capital gains.   So, if you have to eventually sell, after-tax returns might not be as good. 

If you would like to avoid taxes for a portion of your taxable portfolio, what would you hold "forever" that you will never have to sell? 

I'm thinking it would have to be an ETF because you cannot trust any company to do well forever.  With ETFs, you also generally avoid tax leakage due to portfolio-rebalancing and redemptions as they are done using "in-kind" transactions.  Please see https://www.invesco.com/us/en/insights/the-tax-benefits-of-etfs.html. 

 

Edited May 19, 2021 by LearningMachine

[Jurgis]

For US based investors, you might (should?) have majority of your investments in tax shielded accounts. At least that's the case for people I know and I don't think this is an exception. If a person is tax aware, they would start with majority of their investment money in IRAs/401(k)s and the growth from there may/should swamp taxable accounts in a lot of scenarios.

That being said, taxes in taxable accounts is a huge headwind against most active strategies. Almost every time I sold something in taxable account, the right choice was not to sell. My taxable account is AAPL, BRK, FB, GOOGL. Even these are not "forever". I may agree with you that I should have bought ETFs in it instead.

 

Edited May 19, 2021 by Jurgis

[LearningMachine]

21 minutes ago, Jurgis said:

That being said, taxes in taxable accounts is a huge headwind against most active strategies. Almost every time I sold something in taxable account, the right choice was not to sell. My taxable account is AAPL, BRK, FB, GOOGL. Even these are not "forever". I may agree with you that I should have bought ETFs in it instead.

Thanks @Jurgis.  What would that "forever" ETF be for you?  

For this scenario, assume life expectances go up really high and you can leave your "forever" ETF in a perpetual trust.

Edited May 19, 2021 by LearningMachine

[Jurgis]

6 minutes ago, LearningMachine said:

Thanks @Jurgis.  What would that "forever" ETF be for you?  

For this scenario, assume life expectances go up really high and you can leave your "forever" ETF in a perpetual trust.

Total market index. ITOT or equivalent. Although you probably can pick not-total-market index and do as well or better. My opinion on this is not strong.

Bigger question is whether to allocate some part of portfolio to international. And if you do, then you may have to make harder decisions since international indexes have issues (inclusion/exclusion of certain countries, over/underweighting countries, etc.).

[ourkid8]

Outside of an ETF which I agree, I would also add the large Class I rails. In particular, CN Rail based on it's best in class rail network and focus on having industry leading Operating ratios.  

[LearningMachine]

8 minutes ago, ourkid8 said:

Outside of an ETF which I agree, I would also add the large Class I rails. In particular, CN Rail based on it's best in class rail network and focus on having industry leading Operating ratios.  

Thanks @ourkid8.  What would that "forever" ETF be for you?

[ourkid8]

@LearningMachine S&P500 index, I currently hold it in my work pension plan so it is a "forever" hold.        

Edited May 19, 2021 by ourkid8

[jobyts]

When the ETF issuer does trading of its constituent stocks, don't they have to pay tax and eventually get pushed onto the ETF holder? 

[DooDiligence]

My home.

[LearningMachine]

1 hour ago, jobyts said:

When the ETF issuer does trading of its constituent stocks, don't they have to pay tax and eventually get pushed onto the ETF holder? 

  

ETFs can generally avoid tax due to portfolio-rebalancing as it can also be done using "in-kind" transactions, along with redemptions.

For example, please see https://www.globalxetfs.com/etfs-tax-efficiency/:

Quote

[C]onsider an ETF portfolio manager who is rebalancing a fund and needs to sell a position that has appreciated significantly since it was originally purchased. Rather than selling that security for cash and incurring capital gains, the portfolio manager can offload those shares to an AP in a process called a custom in-kind redemption. The AP then buys the shares that the ETF portfolio manager wants to own and returns them to the fund via an in-kind creation. Now, the fund owns the correct securities, but avoided a cash transaction of selling shares for cash.

 

For each specific ETF you are considering, you can check how good of a job the manager is doing in avoiding taxes by using "in-kind" transactions.  For example, you can see here how great Vanguard is doing on its ETFs: https://advisors.vanguard.com/tax-center/year-end-distributions

Edited May 21, 2021 by LearningMachine

[ANP301191]

MSCI ACWI ETF - I think the USD Version is ACWI. I hate that its mostly large cap techs, so would probably add a few more positions to even out the tech bias. Maybe add a little more of a Euro Stoxx 60 in, love some of the large European consumer brands (Nestle, Danone, Ambev, LVMH), especially if I am unable to trade in this scenario.

My pension account holds the regulars (BRK.B, GOOGL, MC.PA, MSFT) along side a couple of different ETFs and a couple of moonshots (PLTR to the moon ) but I dont know if I am going to be involved enough over the course of the next 30-50 years to make "good" investing decisions, so ETFs for me.

[LearningMachine]

I took all of the investments folks shared in this thread and related threads on Equal-Weighted ETFs and Artificial Intelligence, and calculated the CAGR since inception and CAGR over the last 14 years (because most ETFs had been launched before then).  One of the investments folks shared was actually negative returns since inception :-).  So, I left that one out.  I've color-coded companies as yellow, and ETFs generating over 10% per year over 14 years as green, as well as SPY/VTI as green.  Some of the ETFs are Market-cap weighted while some are equal-weighted. 

Clearly, some of these ETFs are trading at high P/Es, and possibly won't perform well forever.  

My question for the fellow board members is which ETFs folks think will continue to outperform SPY and BRK forever, at least over the next 50 years?  Any ideas I missed? 

 

Edited May 23, 2021 by LearningMachine

[Jurgis]

It's impossible to predict 50 years.

It is very likely that none of the specific companies will survive 50 years. Very very likely they will underperform unless they hit some AGI jackpot. But then assuming AGI is benevolent, you likely will benefit immensely even if you're not an investor in the company.

With pistol to the head, I'd buy 40% IWF, 10% XBI, 50% VTI.

 

 

[Gregmal]

MSGS, JOE

[Spekulatius]

XBI is interesting because you get tailwinds from the biotech innovations in a sector that is notoriously difficult for most investors to analyse . The XBI has been weak recently, so one gets a decent entry point, imo.

[LearningMachine]

3 hours ago, Spekulatius said:

XBI is interesting because you get tailwinds from the biotech innovations in a sector that is notoriously difficult for most investors to analyse . The XBI has been weak recently, so one gets a decent entry point, imo.

There is a major risk with XBI too: 

• Because XBI has no minimum cap requirement, one issue is that it picks up anyone hanging out a shingle and claiming to be a biotech company. 
• Because XBI is equal-weighted, the problem can become a major problem as it can allocate a big percentage of your investment to these companies when a dotcom style crazy listing boom is going on.

Lots of media reports out there about biotech bubbles now and in the past, as far as 80s. 

So, I added IBB, which is market-cap weighted, but market-cap-weighting causes it to lose a chunk of the returns.  The other issue is that IBB misses out on NYSE listed biotech companies.  So, if an NYSE listed biotech company finds a major cure, you miss out on that. 

[LearningMachine]

Turns out, on June 21, IBB is going to switch to ICE Biotechnology Index, which includes all U.S. exchanges. 

Along with being market-cap-weighted, which reduces returns, the other catch is ICE Biotechnology Index also includes ADRs, including ADRs from countries where making false statements to U.S. investors is not illegal. 

[Spekulatius]

6 hours ago, LearningMachine said:

There is a major risk with XBI too: 

• Because XBI has no minimum cap requirement, one issue is that it picks up anyone hanging out a shingle and claiming to be a biotech company. 
• Because XBI is equal-weighted, the problem can become a major problem as it can allocate a big percentage of your investment to these companies when a dotcom style crazy listing boom is going on.

Lots of media reports out there about biotech bubbles now and in the past, as far as 80s. 

So, I added IBB, which is market-cap weighted, but market-cap-weighting causes it to lose a chunk of the returns.  The other issue is that IBB misses out on NYSE listed biotech companies.  So, if an NYSE listed biotech company finds a major cure, you miss out on that. 

XBI >> IBB because it captures the outliers much earlier. IBB is mostly a covert Pharma index. Even with all those lousy science cos that go nowhere, the  XBI is the better vehicle.

[KinAlberta]

I’ve owned a few ETFs that have been liquidated or rolled into other ETFs.

One was a Global 50 large cap ETF. Another was a value focused ETF that was liquidated when value was out of favour (the time when investors should be buying rather than following the herd). 

If i were buying an ETF today I’d avoid any and all specialty ETFs and only look at the largest, oldest most established products. 
 

Also, I’d never touch an ETN product. 

Edited May 25, 2021 by KinAlberta

[LearningMachine]

18 minutes ago, KinAlberta said:

I’ve owned a few ETFs that have been liquidated or rolled into other ETFs.

One was a Global 50 large cap ETF. Another was a value focused ETF that was liquidated when value was out of favour (the time when investors should be buying rather than following the herd). 

If i were buying an ETF today I’d avoid any and all specialty ETFs and only look at the largest, oldest most established products. 
 

Also, I’d never touch an ETN product. 

Thanks @KinAlberta for sharing your first-hand experience with the community.   Makes sense to go with largest, oldest most established products. 

Was the rollover done into a related index in a tax-efficient way using "like-kind" exchanges from one basket to the other? 

I've also noticed ETFs come and go, e.g. SPYB was liquidated recently, and now IBB is switching from one index to another (maybe using "like-kind" tax-efficient exchanges?). 

Edited May 25, 2021 by LearningMachine