Fixed-income ETF investors like companies that have lots of money because that will either mean the firm will reinvest for growth or reward its shareholders. However, due to antiquated U.S. tax laws, a good chunk of corporate cash holdings is tied overseas.
Despite the record amounts of cash just sitting in Corporate America’s bank vaults, doing nothing, a majority of the money lies in overseas holdings, according to The Wall Street Journal. Now, this would seem logical since a lot of money is being generated from foreign interests, but that money may stay overseas and never come back home since companies would take a major tax hit if it ever did.
Companies are estimated to have as much as $2 trillion in cash, with more than half overseas.
Back at home, U.S. companies may be taxed at 35% if the overseas earnings ever crosses onto U.S. soil. It has been the standing argument that shareholders are better off with companies holding less cash, but the current environment pushes companies to sit on the money instead. Our government is already discussing whether we should stop taxing repatriated overseas earnings from firms that have already paid foreign taxes.
While that’s not helping the U.S. economy any, it’s to the benefit of ETFs, which have attracted investors looking for yields they can’t get in money markets. Until this situation changes, consider areas where the money is working better, such as PIMCO Enhanced Short Maturity Strategy Fund (NYSEArca: MINT), as well.
Max Chen contributed to this article.