June 23, 2022

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Happy Thursday to you. Can you guess what percent of investors check their investments’ performance once a day or more? a. 29%, b. 39%, c. 49%. Follow the wave 🌊 below for the answer.

Here are the finance topics for today:

The consequences of your investments being sold out
Has inflation peaked?
The $68 trillion wealth transfer & what that means for you

INVESTING

The Consequences of Your Investment Holdings Being Sold-Out

A mutual fund is typically meant to be an easy solution to your retirement savings growing steadily over the decades, right? These investment vehicles are generally sought out for their typically diversified nature and security, but are fund managers putting that classification at stake though when they lend out the underlying holdings?

It's a well-known yet contested topic in the financial community called "securities lending," and one that's not too often discussed.

Securities lending, simply put

A stock mutual fund or ETF will usually hold thousands of shares of different stocks. If there is a short-seller who wants to borrow those stocks and agrees to post some collateral and pay the fund a fee for doing so, a fund will lend them out and make a little extra dough. It's a clever way for fund managers to make incremental revenue.

But, is there a catch? Could lending out your fund holdings actually be detrimental to your money in the long run?

In short... possibly

A study done by Derek Hoystermyer, a finance professor and contributor to the Wall Street Journal, found that active fund managers who’ve made it a habit of lending out north of 1% of your funds' underlying holdings in a given year eventually end up underperforming by 0.62% across multiple classes when compared to funds that don’t lend out shares.

For example, when it came to US large-cap-based funds, those that loaned out less than 1% of their holdings averaged returns of 13.29% per year, while actively managed funds that lent out more than that averaged 12.93%, or 0.36% less per year. Fund performance gets worse for those that lend out more than 2%, not to mention the fund's increased volatility.
A 0.36% annual return different looks like a small number, but for hypothetical's sake, if you had 1 million dollars invested in both a fund that lends out less than 1% of its holding and a fund that lends out more than 1%, your average account balance difference 10 years later would be roughly $107K ($3,480,000 vs $3,373,000).

The big picture

But all fund practices aren't created equal. Fund securities lending policies are not uniform across the board. For example, income earned from securities lending for certain ETFs is estimated and accrued daily into its NAV which may result in returns that can partly offset fund management fees—a potential benefit.

If this seems like a matter that may be relevant for you, make sure you read the fund or fund's parent company's prospectus, semi-annual or annual report so you understand what their securities lending policy is.

ECONOMY

Has Inflation Peaked?

We’ve been seeing monthly numbers above 5% since a year ago, and consistently above 7% since last December. It’s been a long, expensive run, but might it finally be peaking?

The case for peaking inflation

Fast money: Central banks are raising rates at a historically fast clip, and when we combine this with balance sheet runoffs, dropping GDP, and already high inflation, you’ve got a recipe for a recession. Recessions tend to have a dampening effect on inflation, and we already saw our first slight reduction in April’s figures, despite its 0.3% uptick in May.
Companies' decreasing purchasing power: Corporate profits were strong through 2021 thanks to their ability to pass along price increases to their customers. But that can't persist forever. There's a fine balance between raising prices and losing market share, and it seems we're starting to see slowing demand and increasing inventories.
Excess goods: After many retailers suffered shortages due to their lean methods during the supply chain crunch, lots of those formerly out-of-stock items are now held in abundance. Inventory has risen by almost $45 billion (26%+) this year according to late May data, and big names like Gap and Target are already lowering prices to get rid of stuff.
China effect: Although it might seem counterintuitive, China’s slowdown could actually have some positive implications on rising prices in the commodities market, which has been hit hardest (especially energy) by inflation. China is one of the world’s largest consumers of oil, iron, nickel, and other metals, and a decrease in that massive demand is liable to reduce price pressure.
Big picture housing market: Although home prices in the US might still be trickling northward, globally things seem to be slowing down a bit. As a result of higher interest rates and higher prices, global growth in real house prices has slowed accordingly, dropping from 5.4% in Q4 2021 to 4.6% in 2022.

ESTATE PLANNING

The $68 Trillion Wealth Transfer & The Tax Implications

Research approximates that about $68 trillion dollars in wealth will be transferred over the next 25 years or so. This money in question would be shifting mostly from the Baby Boomer generation to Gen X to the tune of about $68 trilly.

Despite the fact that these are broad estimates, it’s no secret at all that the older generations (Silent, Boomer, X) do hold extensive wealth leverage over those under them, and the assets held by those in the eldest categories will have to go somewhere within the next couple of decades.

Oh, and there’s the taxes

The US currently has a tax code in flux, if you will. After the Tax Cuts and Jobs Act in 2017, we saw the exemption ceiling on federal estate taxes double to where it sits presently, at $12.06 million.

But is it as simple as passing down $12.06 million to your heirs tax-free?

Fundamentals to know

An estate is basically all the money and property a person owns when they pass away. As silly as it sounds, it acts as its own unique entity that can be taxed.
An inheritance is just as you probably guessed it—money, property and other assets that are passed to beneficiaries whether or not the original owner has died. An estate tax is not an inheritance tax, and vice versa.
An estate tax is assessed on the estate after the owner's death, before its assets are distributed; while an inheritance tax is imposed on a beneficiary when they receive assets.
Most people don’t have to pay an estate tax because the federal estate tax kicks in only once your estate is valued above $12.06 million in 2022. And the portion of the estate that surpasses $12.06 million is taxed at around 40% in 2022 (simply put). Considering this high level, the vast majority of estates get passed to beneficiaries without tax implications.
And there is no federal inheritance tax.
The caveat: 10 states and Washington D.C. also impose their own estate tax, while 5 impose inheritance taxes, and Maryland does both. And inheritance taxes can get extremely convoluted at the state level.

The overarching point is that the taxes levied on inheritances may not be so favorable in the future as the current administration seeks to make adjustments, and whatever the future may hold even beyond its tenure.

What to know ahead of time

If you’re in line to inherit a considerable amount of wealth, congratulations, here’s your bill. Seriously though, here are some changes that could and/or will happen in the future that could impact your tax bill.

The estate tax exemption is set to sunset in 2025: Planned obsolescence is a part of the tax code too, and in 2025 the federal estate tax exemption is set to return to its pre-2017 level of about $5.6 million, barring further legislative intervention.
The stepped-up basis could become an endangered species: Biden has previously made mention of eliminating one of the most crucial parts of the tax code when it comes to wealth transfers: the step-up in cost basis. The stepped-up basis allows beneficiaries to claim their inheritance at its present fair market value, eliminating any tax on gains made based on the original owner's investment amount. While this seems unlikely for now, it would be a huge blow to those inheriting investments, such as real estate and stocks.
Leverage certain strategies to better plan how you pass on your wealth: Gifting up to $15,000 per year per recipient, front-loading 5 years of this $15,000 gift into something like a 529 college savings plan for a total of $150K can be done on behalf of both spouses with no gift tax return implications.

🔥 TODAY'S MOVERS & SHAKERS

KB Home (+9.7%), the US home builder, as they beat Wall Street's quarterly revenue and earnings estimates; however, future sales growth may be hampered by rising rates and high home prices.
Revlon (-17.4%) after filing for Chapter 11 bankruptcy last week to "strategically reorganize its legacy capital structure and improve its long-term outlook;" its stock rallied from less than $2 per share to over $8 per share just in the last few trading days.
Occidental Petroleum (-0.9%) as Berkshire Hathaway purchased an additional 9.6 million shares bringing their total ownership take to nearly 17%.
Bitcoin (+1.9%) to $20,357.30 (1D)
Ethereum (+4.4%) to $1,094.95 (1D)

This commentary is as of 9:00 am PDT.

🌊 BY THE WAY

Answer. 49% of investors are checking their investments’ performance one a day or more—here's why that's a problem (CNBC Select)
🤷🏻‍♀️ What inflation? The super frugal say they were made for this moment (WSJ)
❤️ ICYMI. Handling finances after the death of a loved one (Finny)
🐴 Wild housing market leads to rise of tiny homes (Axios)
Finny lesson of the day. And earn 10 Dibs (gold coins) by answering each question correctly & then redeem your Dibs for rewards:

Estate Planning Basics

Planning—Other

6 mins

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