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Roger Federer, ETFs, and Ireland’s taxing problem

The so-called deemed disposal rule needs to be abolished

Roger Federer's career holds lessons for investors. Photograph: Tim Clayton/Corbis via Getty Images
Roger Federer's career holds lessons for investors. Photograph: Tim Clayton/Corbis via Getty Images
Proinsias O'Mahony's picture
Proinsias O'Mahony
Mon Jul 08 2024 - 05:00

What has tennis great Roger Federer got to do with Ireland’s penal taxation of exchange-traded funds (ETFs)?

Ritholtz Wealth Management’s Ben Carlson relates how at a recent graduation talk, Federer told students he won almost 80 per cent of matches played in his career, even though he only won 54 per cent of the points. Federer’s point: even the best players win barely more than half the points they play.

This slight advantage over the short run will compound through consistency over the long run. Carlson’s point: it’s the same with stocks.

Historically, the S&P 500 has advanced in just over half (52.4 per cent) of trading days. Just as Federer lost almost half his points, indices fall almost half the time.

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Nevertheless, this tiny short-term advantage compounds over time, driving enormous long-term returns. “The benefits of compounding can be remarkable if you can just stay out of your own way,” says Carlson.

True, but this parable is another reminder of the infuriating nature of Ireland’s taxation of ETFs. Ireland’s eight-year deemed disposal rule forces investors to pay 41 per cent exit tax even if they have not sold their fund. Eight years is not enough to allow gains to snowball and compound. This even negatively affects Revenue, which gets a small amount of tax after eight years at the expense of much more later on.

Budget 2025 is expected to include investment tax changes. One hopes deemed disposal is on the way out, and ordinary investors get the chance to enjoy the Federer effect.

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