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An Expanding Category Of ETFs Built To Limit Taxes
New funds are using a section of the tax code to transfer assets without a tax hit . By Ron DeLegge
MINIMIZING TAXES HAS BEEN A LONGTIME draw for those investing in exchange-traded funds . The funds ’ unique structure prevents shareholders from saddling other shareholders with a tax bill when they decide to sell their shares . Moreover , the low portfolio turnover and in-kind redemptions also contribute to the tax efficiency of these vehicles .
Now , a new category of ETFs aims to cut investors ’ tax bill even further by using IRS Section 351 .
A Section 351 conversion lets investors move assets , including appreciated separately managed account assets , into new ETFs without paying capital gains tax immediately . This is a powerful tool since it removes tax as a frictional cost .
“ I ’ ve called this a get-out-of-jail-free card , since investors have the option to reallocate ‘ locked-up ’— well above cost basis — assets without tax drag ,” says Brent Sullivan , founder of
Tax Alpha Insider . Sullivan notes that Section 351 is not new to the Internal Revenue Code ; certain asset managers , RIAs and family offices have been quietly taking advantage of it over the past few years .
One example is the Argent Mid Cap ETF ( AMID ), which debuted in August 2022 . Although the fund ’ s seeding period with portfolios for tax-free transfer ended when the fund was launched three years ago , the Argent fund is now open to all investors like a normal ETF . It has around $ 100 million in assets and charges annual expenses of 0.52 %.
Another example is the CCM Global Equity ETF ( CCMG ), which launched in January 2024 with $ 925 million . The fund is among the biggest ETFs within this burgeoning category ; it ’ s managed by an affiliate of Carlson Capital Management , which introduced the fund as a tax-friendly portfolio solution for its clients .
An ETF ’ s seeding period represents a period of time before
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