Large foreign investors are reportedly moving tens of billions of dollars quarterly between BlackRock's iShares Core S&P 500 ETF (IVV) and Vanguard S&P 500 ETF (VOO) to bypass the 30% US tax on dividends. This strategic shuffle, observed since 2023, involves selling one ETF before its dividend ex-date and immediately buying the other, thus maintaining market exposure without directly receiving taxable dividends. Bloomberg estimates this tactic saved approximately $147 million in US taxes last year. While dividend payments are avoided, investors still capture the equivalent return through price adjustments, which are taxed differently for non-residents.
The practice is entirely legal and has become so regular and predictable that around $40 billion flows from IVV to VOO every three months, only to reverse a few days later. This strategy is not limited to these two ETFs, with similar movements noted in other S&P 500-indexed funds and BlackRock's SGOV, an ETF investing in short-term Treasury bills. Sovereign wealth funds, pension funds, and major institutions are identified as potential users of these tactics, often as part of more sophisticated "cash-and-carry" strategies.
The core of the strategy lies in exploiting the differing dividend distribution dates of the two almost identical S&P 500 ETFs. By avoiding the direct receipt of dividends, foreign investors circumvent the 30% withholding tax. A US Treasury official has confirmed that these direct operations between similar investments are not currently targets of administrative scrutiny. The significant tax savings highlight the appeal and legality of this maneuver for large international investors.
