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IPFS News Link • Wall Street

The ETF Tax Dodge Is Wall Street's "Dirty Little Secret"


One day last September an unidentified trader pumped more than $3 billion into a tech fund run by State Street Corp. Two days later that trader pulled out a similar amount.

Why would someone make such a large bet—five times bigger than any previous transaction in the fund—and then reverse it so quickly? It turns out that transfusions like these are tax dodges, carried out by the world's largest asset managers with help from investment banks. The beneficiaries are the long-term investors in exchange-traded funds. Such trades, nicknamed "heartbeats," are rampant across the $4 trillion U.S. ETF market, with more than 500 made in the past year. One ETF manager calls them the industry's "dirty little secret."

Typically, when you sell a stock for more than you paid, you owe tax on the gain. But thanks to a quirk in a Nixon-era tax law, funds can avoid that tax if they use the stock to pay off a withdrawing fund investor. Heartbeats come into play when there isn't an exiting investor handy. A fund manager asks a friendly bank to create extra withdrawals by rapidly pumping assets in and out.

That's Quite a Pulse

Banks help ETFs avoid billions of dollars in taxable gains by quickly pumping money in and out

Anarchapulco 2023