Fund providers trading on major exchanges are preparing to launch funds designed to ease the tax burden of investors from the record stock market.
Although ETFs are considered to be more tax-efficient than mutual funds, Astoria Portfolio Advisors is planning to launch the Astoria US Enhanced Core Equity ETF (LCOR) in October. The fund uses a tax mitigation strategy known as exchange or conversion, under section 351 of the tax law.
If the stock is prepared on a large scale, investors will be over-enriched in that name and can place them on the hook for a massive capital gains tax if they try to sell their positions. The exchange of Section 351 allows investors to reassign some of their positions without causing a capital gains tax. They transfer these assets to the newly created ETF and receive shares in the fund in exchange.
Bruce Labine, the company’s chief operating officer and ETF head, believes LCOR is particularly relevant as it could leave investors with a fairly large tax bill if it benefits.
“The idea behind the 351 fund is that they have a lot of stocks that get stuck in tax terms because they’re so up. Think about buying Nvidia two years ago. I bought Microsoft a decade ago,” he told CNBC’s “ETF Edge” this week.
Based on the end of Thursday, Nvidia has scored 83% over the past year, while Microsoft has increased by 31% over the same period. As of July 15th, Big Tech Stocks accounted for a third of the S&P 500, according to S&P Global.
Bettafi’s research director Todd Rosenbruce suggests that Astoria is taking advantage of the growing longing to gain more tax efficiencies.
“Etfs are generally tax-efficient vehicles, so unless you buy or sell, you won’t pay capital gains,” he said. “This really focuses on people who have a concentrated position of individual stocks and want to move them instead of buying an ETF and holding it inevitably the same.”
