The recent trend of asset managers utilizing the 351 exchange strategy to launch new ETFs has caught the attention of investors and industry experts alike. This tax-efficient method allows stock portfolios with significant appreciation to be transferred to ETFs without triggering capital gains taxes, making it an attractive option for issuers looking to seed new products.
Firms like Alpha Architect and Cambria have been at the forefront of incorporating the 351 exchange into their ETF offerings. However, this strategy is not limited to specialized shops, as more asset managers are adopting it for new ETFs without necessarily marketing it as a key feature. Morningstar associate director Daniel Sotiroff highlighted that the 351 exchange is becoming a popular choice for launching new investment strategies.
The minimum investment threshold for 351 exchange ETFs has traditionally been high, with initial investment minimums of $1 million or more. However, Alpha Architect recently introduced a fund with a minimum investment as low as $150,000 for Charles Schwab accounts. This move signals a potential shift towards making the tax-efficient strategy available to a wider range of investors.
Several firms are preparing to launch ETFs with 351 exchange provisions, including Ritzholtz Wealth, Polen Capital, and Cloverpoint Capital. American Century’s Avantis Investors also made waves with the launch of their Total Equity Markets ETF (AVTM), partially seeded through 351 exchanges.
While the rise of 351 exchanges has been met with enthusiasm, there are potential regulatory concerns on the horizon. Congress is considering restrictions on these exchanges, and the US Treasury may issue guidance on their usage. Investors should also be cautious about the differences in investment strategy between their existing stock portfolios and the seeded ETFs, as well as ensuring the viability of the ETF in attracting assets.
In conclusion, the use of 351 exchanges in launching new ETFs is a noteworthy development in the industry. As asset managers continue to explore this tax-efficient strategy, investors should stay informed about potential regulatory changes and carefully assess the implications for their investment portfolios.
