On August 16, 2022, President Biden signed into law the Inflation Reduction Act (1). The Act makes sweeping changes to taxation, healthcare spending, climate policy, and job creation in an effort to reduce inflation and recover after a painful and disruptive pandemic. While the Penn Wharton Budget Model (2), a nonpartisan research initiative, estimates that the Act will likely not alter inflation, it will likely reduce the government deficit, increase wages, improve productivity, and boost GDP. What’s more? We believe it likely won’t negatively impact investors, especially so for those focused on the fundamentals.
The healthcare industry is a strong focus of the Act, estimated to receive roughly $64 billion of the Act’s $437 billion total investment. It significantly expands Medicare benefits (3) by capping insulin at $34 per month and out-of-pocket drug costs at $2,000 per year by 2025. Most notably, the Act allows Medicare to negotiate the prices of 100 or so drugs over the next decade, though only about 10 high-cost drugs (4) will be affected as of 2026, with closer to 20 drugs becoming negotiable by 2029. For the most part, we believe these changes will likely not impact healthcare sector investors and may instead incentivize investment in more innovative companies. We believe fundamental investment strategies that allow for in-depth research are essential for navigating such targeted policies over the coming months.
Aside from healthcare reform, the Inflation Reduction Act is largely a climate bill aiming to reduce emissions by 40% by 2030. To achieve its aggressive goals, the Act is estimated to raise $737 billion (3), leaving $300 billion to reduce the nation’s deficit. $222 billion of these funds will be raised through a new 15% Corporate Minimum Tax for companies with at least $1 billion in income as well as foreign companies (4) with average US income over $100 million. About 200 of the largest corporations (2) will be impacted by this tax. On the surface, the method of raising the revenue needed to bring the Inflation Reduction Act to fruition may sound alarm bells for investors. In reality, experts suggest these dramatic changes in taxation policy will likely have little tangible impact for retail investors.
Lastly, the Inflation Reduction Act will raise roughly $74 billion (3) by imposing a 1% stock buyback fee on all publicly traded companies as of January 1, 2023. A stock buyback (5) allows a public company to use its cash to buy its own stocks on the open market to reduce the number of shares outstanding, increase the earnings per share, and potentially raise the stock price. Experts suggest (4) that such a small tax likely won’t outweigh the incentive of pursuing stock buybacks, though many companies may respond by offering dividends. In that case, investors may feel the impact in a lower tax return, though the realized impact should be negligible. The 1% stock buyback tax and 15% minimum corporate tax are said to reduce the earnings of S&P 500 companies by only about 1.5% per share (5).
We believe responding appropriately as an investor requires in-depth knowledge of every holding in a portfolio to track how each company reacts to the Act’s new policies. Several of TrueShares actively managed ETFs are highly concentrated, with only 25 to 35 companies each, to allow for robust fundamental analysis. Two such funds include the Low Volatility Equity Income ETF (DIVZ) that focuses on large-cap companies already offering dividends, as well as the AI and Deep Learning ETF (LRNZ) composed of companies at various stages of development across all sectors of the economy. As the Inflation Reduction Act is implemented, we believe investors should look to fund managers using fundamental analysis and concentrated portfolios seeking to both reduce potential volatility and take advantage of the changing tide toward sustainable development in America.
Learn more about TrueShares Low Volatility Equity Income ETF (DIVZ) at www.truesharesetfs.com/divz.
Learn more about TrueShares Technology, AI & Deep Learning ETF (LRNZ) at www.truesharesetfs.com/lrnz.
Sources:
(1): https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/15/by-the-numbers-the-inflation-reduction-act/
(2) https://knowledge.wharton.upenn.edu/article/how-the-inflation-reduction-act-will-boost-energy-security-health-care-and-tax-revenues/
(3): https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf
(4): https://www.fidelity.com/learning-center/trading-investing/inflation-reduction-act
(5): https://www.forbes.com/advisor/investing/how-the-inflation-reduction-act-affects-investors/
Earnings per share (EPS) is a company’s net profit divided by the number of common shares it has outstanding. EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.
TrueShares Low Volatility Equity Income ETF is also subject to the following risk: As an ETF, the Fund is exposed to the additional risks, including: (1) concentration risk associated with Authorized Participants, market makers, and liquidity providers; (2) costs risks associated with the frequent buying or selling of Fund shares; (3) market prices may differ than the Fund’s net asset value; and (4) liquidity risk due to a potential lack of trading volume. Dividend Paying Security Risk. Securities that pay high dividends as a group can fall out of favor with the market, causing these companies to underperform companies that do not pay high dividends. Dividends may also be reduced or discontinued. Equity Market Risk. Common stocks are susceptible to general stock market fluctuations and to volatile increases and decreases in value as market confidence in and perceptions of their issuers change based on various and unpredictable factors including but not limited to: expectations regarding government, economic, monetary and fiscal policies; inflation and interest rates; economic expansion or contraction; and global or regional political, economic and banking crises. Market Capitalization Risk. The Fund may invest is securities across all market cap ranges. The securities of large-capitalization companies may be relatively mature compared to smaller companies and therefore subject to slower growth during times of economic expansion and may also be unable to respond quickly to new competitive challenges, such as changes in technology and consumer tastes. The securities of mid-capitalization companies may be more vulnerable to adverse issuer, market, political, or economic developments than securities of large-capitalization companies and generally trade in lower volumes and are subject to greater and more unpredictable price changes than large capitalization stocks. The securities of small-capitalization companies may be more vulnerable to adverse issuer, market, political, or economic developments than securities of large- or mid-capitalization companies and generally trade in lower volumes and are subject to greater and more unpredictable price changes than large- or mid-capitalization stocks. Depositary Receipts Risk. American Depositary Receipts (“ADRs”) have risks similar to those of foreign securities (political and economic conditions, changes in the exchange rates, etc.) and entitle the holder to all dividends and capital gains that are paid out on the underlying foreign shares.
The TrueShares AI & Deep Learning ETF (AI ETF) is also subject to the following risks: Artificial Intelligence, Machine Learning and Deep Learning Investment Risk – the extent of such technologies’ versatility has not yet been fully explored. There is no guarantee that these products or services will be successful and the securities of such companies, especially smaller, start-up companies, are typically more volatile than those of companies that do not rely heavily on technology. Foreign Securities Risk -The Fund invests in foreign securities which involves certain risks such as currency volatility, political and social instability and reduced market liquidity. Growth Investing Risk – The risk of investing in growth stocks that may be more volatile than other stocks because they are more sensitive to investor perceptions of the issuing company’s growth potential. IPO Risk – The Fund may invest in companies that have recently completed an initial public offering that are unseasoned equities lacking a trading history, a track record of reporting to investors, and widely available research coverage. IPOs are thus often subject to extreme price volatility and speculative trading. New Issuer Risk – Investments in shares of new issuers involve greater risks than investments in shares of companies that have traded publicly on an exchange for extended periods of time. Non-Diversification Risk – The Fund is non-diversified which means it may be invested in a limited number of issuers and susceptible to any economic, political and regulatory events than a more diversified fund.
All references to tax matters are provided for informational purposes only and should not be considered tax advice and cannot be used for the purpose of avoiding tax penalties. Investors seeking tax advice should consult an independent tax advisor.
