A $40 Billion ETF Shuffle Helps Foreigners Dodge US Taxes

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1:34Denitsa Tsekova:You're listening to Bloomberg Businessweek with Carol Masser and Tim Stenevek on Bloomberg Radio. It is today's big take. It's one of the most read stories on the Bloomberg Terminal. It is a Bloomberg exclusive. I'm just going to read the beginning of it because I think this does a very good job of describing what exactly is going on in this intricate world of ETFs with different letters. Every three months, like clockwork, investors pull$40 billion or more from BlackRock ETF that tracks the S &P 500. Deposit most of it into a near-identical Vanguard product. A few days later, they reverse the trade, and the money flows back the other way.

2:13Denitsa Tsekova:We are talking about VOO and IVV. Those are the tickers. The BlackRock iShares core S &P 500 ETF and the Vanguard S &P 500 ETF. On the byline, Zach Meiter, a reporter for Bloomberg News, also with us, Danica Seikova, cross asset reporter for Bloomberg News. They both join us here in the Bloomberg Interactive Brokers Studio. It's all about taxes, Zach. What are they avoiding here and who is moving this money? Right. So there's this massive movement in the market. People are going out of one position into another one in the back. The reason is these are foreign investors who want to avoid tax on the dividend.

2:56Denitsa Tsekova:So just before the date when they would be owning that ETF would entitle them to the dividend, they sell it and they buy an almost identical ETF, hold it for a couple of days and then sell that one and go back to the one they were in before. Does it only happen in a month where there are gains? It happens right around the dividend date, which is four times a year. So every quarter on a certain predictable date is the date when owning the ETF gives you the right to get that dividend. They don't want the dividend, so they just sell before and then switch into something else and then buy after. It's very clean.

3:35Zachary Mider:You really put into perspective, because in the article you say the pattern is so big that it stands out in the$16 trillion U.S. ETF market. Denise, I want to say, how long has this been going on? We started noticing around September 2024, but you can see, especially in the past year, it's been more and more evident. We're talking about billions moving out of those ETFs. These are two of the most liquid ETFs in the world. We're talking about VU, which is a one trillion, with a T, ETF. So, these are big moves. What we're seeing is that there are more vehicles involved into the trade. We talk about VU and IVV, but there is a State Street product that we're seeing similar flows that pretty much emerged in the past three to six months or so.

4:17Zachary Mider:So there are more and more products that are part of this. And a lot of those firms are making changes. For example, State Street changed its dividend date. And one of the reasons they do that is they said to make switching between their own funds easier. So obviously, there is the tax benefit for the people doing the trade. But those big organizations are getting massive flows coming in and sometimes out around this. And we saw State Street. We also see a similar treasury ETF as Gov from BlackRock that is seeing. So, it's a small ecosystem of products that are shaping around those products.

4:55Denitsa Tsekova:Yeah, Danica knows a thing or two about ETFs, guys. So, if you want more ETFs, just follow Danica. Zach, when I read this story and I think about your own reporting history, I think back to your Pulitzer Prize 2015, you wrote about inversions and U.S. companies dodging taxes. Right now, you're writing about foreign investors dodging U.S. taxes. Are there any similarities or is there a through line here? Wow, that's a great question. I don't really know. I mean, one important difference is that the government was very unhappy with the corporate tax avoidance that we wrote about a long time ago, where companies would renounce their U.S.

5:37Denitsa Tsekova:citizenship, as it were, to avoid paying U.S. taxes. Here, the government has kind of said, this one's okay. It's basically just you're allowed to buy and sell stock whenever you want to. And here, the foreign investors are simply selling one stock and then buying another and going back. So unlike previous versions of this dividend avoidance that involved kind of a product that a bank would sell that involved a swap or something, those were attacked by the IRS and Treasury. Here, it looks like the government doesn't see this as an abuse. Then the question for either of you, do we know how much over the last few years has been avoided in taxes by this happening?

6:26Denitsa Tsekova:Yeah, so compared to the size of all the trading, it's actually quite tiny. We calculated maybe$147 million just in the last, in 2025. But in order to achieve that, you had to move$40 billion in and out of these ETFs four different times just to achieve that relatively modest tax savings.

6:51Zachary Mider:How did this get in your radar in the first place? That's my question.

6:55Denitsa Tsekova:So a couple of years, a couple of months ago, Denisa and I and another colleague were kind of looking at these flows and were just kind of mystified by why they were so large. Because you can see if you just look at how much is is in IVV, it just goes up and down a lot. And it's very much like clockwork every quarter. And so we just started asking around and people gave us the answer eventually.

7:20Zachary Mider:You know what's fascinating? That if you ask anyone in the ETF industry, they say, we've seen the flows. They don't necessarily know what it is. But when you look at the ex-dividend date and we see this flow, it says, oh, it all makes sense. So definitely, it's been growing bigger and bigger. We wrote about some of the institutional players who are taking part of it. And we have some reporting that people familiar see that Marshall Waste, which is obviously a massive British hedge fund, is one of the players involved into this trade. And more generally, one of the trades we're looking at is the cash and carry trade, which is a very popular institutional trade as fund costs have been rising.

7:58Zachary Mider:And a lot of pension funds endowments are really interested in the trade. So, obviously, we mentioned just a few names in the stories. But here we have more of a kind of an institutional profile of the people that are doing those trades.

8:10Denitsa Tsekova:So I guess the question, you know, if it's not so much money that the government is losing as a result of this, if it's a totally legal loophole that these companies are finding, I'll put on my, you know, what my editor used to say to me all the time. Why should we care? Yeah. So, I mean, I think part of what's interesting is just the massive nature of these transactions. You know, some 40 or 50 billion dollars every quarter is kind of moving in and out. In fact, I think if I'm not wrong here, Denise, a couple quarters ago or maybe last quarter, there was a it actually caused. You can tell the rest of the story.

8:52Zachary Mider:Yeah, because obviously, like those are the big S &P 500 funds and there is a constant competition of like who's the biggest. So there was a little competition between BlackRock and Vanguard in terms of the biggest. And those flows were so big and they're so predictable that they kind of ruined the table of who's first and who's second, because we're talking about billions moving all the time. So even for those companies, it's kind of changing the leadership board. But how important is that? It's very interesting because we attended the meeting with Treasury officials that flagged a couple tax-aware trades.

9:25Zachary Mider:And there is a similar trade that's packaged inside of an ETF that they do care about and they're worried about. There are a few different ETFs that do similar trade in the U.S., available to U.S. investors, and that is raising scrutiny. But when it comes to doing this at such a big level outside of the ETF vehicle, for now, it's not a problem for treasury officials. How much bigger can this get, Zach? I'll bring this to you.

9:51Denitsa Tsekova:Well, I think part of what's going on is that the reason why we started seeing this, it seems like, is that there's this underlying trade. these guys are not just wanting to own the S &P. They're doing a trade where they're selling futures, S &P futures, and buying the ETF as a hedge and harvesting the difference in spread. So it's essentially a place to put extra cash to earn a spread that's more favorable than just treasuries. And so as that trade has gotten very popular, a lot of institutional investors have gotten bigger and bigger and bigger into it. and therefore the tax can kind of ruin this trade.

10:31Denitsa Tsekova:So they have to find a way around the tax, which is why we see these massive flows. So, Danica, given that it is predictable and it happens like clockwork quarterly, is there a way that third parties can arbitrage this?

10:44Zachary Mider:Yeah, that's a good question. I guess at some point, we know when it's going to happen. Most likely the middle of September. Look at the falls. It's probably going to be something similar.

10:51Denitsa Tsekova:You only find that out in real time. Can you see the actual daily move of something? Because ETFs trade in real time.

10:57Zachary Mider:The move in NAV, I don't know if people are actually arbitraging to it. I mean, everything in ETF land, that's become predictable. Anything from ETF balancing flows at the end of the day to just general moves in ETFs. I think everything is being arbitraged and everyone is being looking at. And I'm sure anyone looking at the flows is doing that. I don't know. I haven't heard of actual trade. But definitely, it's predictable. It's getting bigger. We're seeing more ETFs being part of this trade, which maybe is part of the reason you don't want it to be as predictable. Like, I guess, if you split the flow between different vehicles and you use more names, nevertheless, it is out there.

11:36Denitsa Tsekova:It's a great story. It's one of the most read on the Bloomberg Terminal. It is today's big take. Zach Meiter and Danica Seikova, they are both reporters for Bloomberg News. They are here in the Bloomberg Interactive Brokers Studio this afternoon. Check out their story on the Bloomberg Terminal. A$40 billion ETF shuffle helps foreign investors dodge U.S. taxes.

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