ETFs To Play The Online Sales Tax Reform

by on May 14, 2013 | ETFs Mentioned:

2013 has become the year of higher taxes as Congress continues to push through higher tax burdens on the public in an effort to control and bring down the nation’s astronomical debt pile. Earlier in the year, Congress implemented higher income taxes for those earning over $450,000, which is expected to reduce the deficit by some $620 billion over 10 years, far less than Obama’s $4 trillion in deficit reduction goal. And next on the list for Congress is targeting one of the largest and most popular markets: the Internet [see The Cheapest ETF for Every Investment Objective].

Last week, the U.S. Senate voted to pass the Marketplace Fairness Act, which will require all online retailers to impose sales taxes for the states where they ship goods. Prior to this legislation, online shoppers have benefited from purchasing items on e-commerce sites essentially tax-free. But now with several big name companies, brick and mortar businesses and President Obama on board with the new tax, Americans can expect online sales taxes to go into effect as early as October, 2013.

Winners And Losers of Online Sales TaxOnline Sales Tax

If the House also passes this legislation, e-commerce sites like Amazon (AMZN) and eBay (EBEY) will obviously be negatively impacted by the tax; though recently, Amazon changed its stance on the issue and now supports taxing online purchases. Major retailers, as well as local brick and mortar businesses will benefit most from the legislation, since the tax will essentially level the playing field and discourage physical stores from being “showrooms” for online shoppers [see Consumer Centric ETFdb Portfolio].

For those looking to profit from the new online sales tax policy, or simply want to keep a close eye on the sector, here are several ETFs that will likely be impacted:

  • SPDR S&P Retail ETF (XRT, A): This is by far the largest and most popular ETF offering exposure to the retail industry. Though the fund is equally weighted, the majority of assets are allocated to apparel and specialty stores. Investors should note, however, that roughly 8.7% of the portfolio consists of Internet retail companies.
  • Market Vectors Retail ETF (RTH, B+): This ETF is designed to track 25 of the largest retail companies, including Wal-Mart (WMT), Home Depot, Inc. (HD) and CVS Caremark Corp (CVS). In terms of exposure to e-commerce, Amazon (AMZN) accounts for nearly 9% of total assets.
  • DJ Internet Index Fund (FDN, C+): This fund invests in companies that generate at least 50% of revenues from the Internet, the sector that will be most affected by the tax. Top holdings include Google (GOOG), Amazon (AMZN), eBay (EBAY), and (PCLN).

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Disclosure: No positions at time of writing.