A $40 Billion ETF Shuffle Helps Foreigners Dodge US Taxes

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You're listening to Bloomberg Businessweek with Carol Massar and Tim Stenovec on Bloomberg Radio.

**Carol Massar** (0:16)
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. 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 Mider, a reporter for Bloomberg News, also with us, Denitsa Tsekova, 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?

**Zachary Mider** (1:16)
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. 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.

**Carol Massar** (1:45)
Does it only happen in a month where there are gains?

**Zachary Mider** (1:50)
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 you, 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.

**Tim Stenovec** (2:09)
You really put it into perspective because in the article, you say the pattern is so big that it stands out in the $16 trillion US ETF market. Denitsa, how long has this been going on?

**Denitsa Tsekova** (2:19)
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 $1 trillion with a T, the ETS. 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. 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. One of the reasons they do that is they set to make switching between their own funds easier.
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.
We saw state street. We also see a similar treasury ETF as Gov from BlackRock that is seeing. It's a small ecosystem of products that are shaping around those products.

**Carol Massar** (3:29)
Denitsa knows a thing or two about ETFs, guys. If you want more ETFs, just follow Denitsa.
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 in US companies dodging taxes. Right now, you're writing about foreign investors dodging US taxes. Are there any similarities or is there a through line here?

**Zachary Mider** (3:54)
Wow, that's a great question. I don't really know. 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 US citizenship, as it were, to avoid paying US 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.