About 50 days, 2025 taxes will be due, and this could be painful for investors following a year of double digit gains for the major equity averages in 2025.
But traders also face taxes on ETF dividends even if they continue to hold.
But some funds address this by compounding dividend interest back into the fund instead of paying to holders.
Now Lion shares recently launched an ETF.
Like this and it does provide exposure to the total US stock market.
Joining me live here at the New York Stock Exchange is Sofia Massey, founder and CEO of Lion shares.
Sofia, great to have you here.
Thank you so much for joining me.
Thanks for having me.
It's great to be here.
Well, we are counting down to tax day.
It is already tax season, so what does tax efficient exposure to the total US stock market actually look like.
A lot of people don't realize that ETFs actually pay dividends, and those can be subject to a variety of taxes at the city, state, and federal level.
People may not understand that these dividends are being taxed potentially at their ordinary income levels, and so depending on the size of the dividend, it can actually have a very significant impact on the after-tax return of the holding.
What we do at Lionhars is set up the fund in a completely new way where we're able to strategically rebalance the fund in a way such that we basically keep the returns inside of the ETF and aim to pay no distribution to our investors, which ideally creates no taxable event and makes it a much more Efficient products and you know that it goes without saying that ETFs are a popular investment vehicle for Americans out there so you just mentioned that city federal as well as a state and that can be confusing for tax preparers as well as investors like so what would you say to them.
I'd say that when it comes to ETFs, there's lots of different dividends that can be paid out.
Sometimes ETFs will pay out a capital gains dividend.
Sometimes they will pay out an ordinary income dividend.
So there really are lots of nuances there and it's something that you do want to have a conversation with your tax planner about.
And even more so, I think sometimes investors take a sort of reactive.
To managing these taxes, you don't really think about it until it's April and you're kind of looking back on the past year.
I'd like investors to be a bit more proactive with how they approach their tax planning with ETFs before you start thinking about investing in some of these high yield ETFs.
Think about how you might get that exposure in a more tax efficient way when you're making that investment, not when it's already too late and it's already been done.
So we all know about advantages when it comes to dividend interest, but what are the advantages of compounding versus paying it?
The benefit of keeping the returns inside of the fund instead of paying out the distribution, it helps to eliminate that tax drag concern where if you're required to pay taxes on that dividend every year, each year that's going to erode some amount of your position.
So let's say that you're paying something like 50 basis points a year due to taxes.
Over a 10 year period that might be about 12%.
Of a loss that you could have otherwise had over a 30 year time horizon if you're really saving for retirement that might start to look like something like a 700% decrease in total return.
So you can see that each year the compounding effect really is exponential and has a material effect on people's performance.
Sofia, last but not least we have lessened.
60 seconds here.
Do you expect this type of ETF strategy to gain popularity?
Definitely.
I think it's a very novel idea.
It's sort of the modern way to approach tracking the total US stock market and you know ETFs like ticker TOT, that's what we've put out.
I think there's potential to create multiple versions of the.
Potentially tracking other asset classes as well.
So yeah, I really encourage investors to look into ETFs like TT and see whether it fits into their portfolio and see how it could potentially replace other broad market ETFs.
Well, Sofia, great having you live at the New York Stock Exchange.
Thank you so much for joining us as we head into tax preparation season.
Thank you so much.
Thank you.
