Equities Trade “DIRTY” – What that Means and Why it Matters

Overview: The purpose of this whitepaper is to educate readers about a flaw in our market structure, that causes income-producing securities to trade “Dirty." Dirty security pricing causes investors to pay inflated values for income-producing securities and then...

The purpose of this article is to illustrate how FairShares can give an investment manager the best performing index fund family in the world. This analysis is not theoretical – it is a fact.

FairShares patent-pending product offers an investment manager and its shareholders structural alpha.  By simply removing the dividends from the value of the investment fund, we can dramatically improve the performance profile of the investment fund in numerous ways.

Consider the table below showing the benefits realized by individual investors, and their investment managers, by using FairShares proprietary equitable distribution technology.

FairShares offers investors and investment managers what we call Structural Alpha.  Our alpha is not delivered through superior stock picking, which is very hard to do. Instead, we offer better returns by enabling a superior security structure. What makes index funds interesting for FairShares is that they are all identical, and that makes FairShares performance stand out. For example, two S&P 500 investment funds are comprised of the same securities in the same percentages. The only thing that differentiates them is the fund structure (i.e., ETF or Mutual Fund) as well as the management fee. So when comparing index funds, we have an “apples to apples” comparison.

What definitive competitive advantages does FairShares offer to an investment manager who wants to use FairShares’ technology on their index funds? Let’s use an S&P 500 fund as an example and we will assume, for comparison purposes, that both funds, the traditional fund and the FairShares fund, have identical management fees. We will call the S&P 500 fund using FairShares’ technology the “FairShares 500”.

  • Since there is no dividend included in the net asset value of the FairShares investment fund, the FairShares 500 will trade at a discount to all other comparable S&P 500 funds (SPY, VOO, FXAIX, VFINX, etc). Since the funds are identical, which investment fund will investors purchase? Will they buy the overvalued and more expensive traditional version or the FairShares 500, which, at times, can be bought at a 50 basis point discount? Common sense will prevail.
  • Since the FairShares 500 will trade at a discount to its competition, an investor purchasing the FairShares 500 will be able to buy more shares with the same amount of money.
  • The FairShares 500 investor who was able to purchase more shares, will now have a higher annual yield as they will collect dividends from each additional share purchased.
  • Since FairShares 500 investors never buy a dividend, FairShares 500 investors never have to pay taxes that they do not owe. These tax savings immediately increase the return for the FairShares 500 investor and the money that was saved by not having to pay unnecessary tax, can be invested and will grow for the next 30 years into a much larger amount.
  • An investor who owns a FairShares 500 fund, and then sells the fund, will be paid their pro-rata share of income for every single day that they owned the fund. In a traditional fund structure, sellers do not receive any income. If the shareholder owned the FairShares 500 fund for 60 days, the investor would be paid “qualified income,” which is currently taxed at a federal marginal rate of ~20%. The shareholder in a traditional S&P 500 fund who sells their fund after owning it less than 12 months will receive their income in the form of a capital gain. The current tax treatment for short-term capital gains is a federal marginal rate of ~40%. Therefore, the FairShares 500 investor will cut their tax bill in half when they sell!
  • Since the FairShares 500 fund will always trade at its fair value, there will be no required drop in the security’s price on the ex-dividend day. By avoiding periodic crashes in the security’s price, 1) the fund’s volatility will decrease, and 2) the fund’s risk-adjusted returns will increase, making the FairShares 500 a sought after choice by investment advisors for constructing portfolios.

There are additional benefits available to the FairShares 500 investor, but as you can see, there is simply no comparison between a FairShare index fund and its traditional counterparts.

FairShares can “clone” any existing income-producing investment fund and outperform it. That is a huge deal!

It should also be noted that investment advisors have a fiduciary duty to their clients to provide what is called “best execution.” According to the SEC, best execution means “an adviser must seek to obtain the execution of transactions for each of its clients such that the client’s total cost or proceeds in each transaction are the most favorable under the circumstances.”1

Given the duty that investment advisors have to their clients, it is worth noting that advisors are incentivized, in terms of meeting their duty to provide best execution, to allocate to a FairShares index fund over its traditional counterparts. FairShares lowers the total cost of ownership of an investment fund making a FairShares investment fund a better alternative while providing shareholders with a much lower total cost of ownership.

If you are an investment manager who seeks a competitive advantage, please contact us so that we can provide you the technology you need to compete with large low cost index fund providers.

If you are an individual investor and are tired of paying more than an investment fund is worth and paying taxes, you do not owe, share this article on social media, and with your investment managers with whom you are currently invested.  Tell them you want to #BuyFairShares

*1 https://www.sec.gov/rules/interp/2019/ia-5248.pdf



Jeremy Roseberry


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