A major exchange-traded fund provider is getting ready to launch a fund designed to ease investors’ tax burdens from a record-setting stock market.
Even though ETFs are considered more tax efficient than mutual funds, Astoria Portfolio Advisors plans to launch the Astoria U.S. Enhanced Core Equity ETF (LCOR) in October. The fund uses a tax-mitigation strategy that’s known as an exchange or conversion under Section 351 of the tax code.
When a stock has a huge run-up, investors may end up overconcentrated in that name, putting them on the hook for large capital gains taxes if they try to sell down the position. With a Section 351 exchange, investors may be able to reallocate some of that position without triggering capital gains taxes. They transfer those assets to a newly created ETF and receive shares of that fund in exchange.
Bruce Lavine, the firm’s chief operating officer and head of ETFs, thinks LCOR is particularly relevant as Big Tech’s outperformance can leave investors with a pretty hefty tax bill if they take profits.
“The idea behind a 351 fund is that you have a lot of stocks that get stuck from a tax perspective because they’re up so much. Think about buying Nvidia two years ago. Perhaps you bought Microsoft 10 years ago,” he told CNBC’s “ETF Edge” this week.
Based on Thursday’s close, Nvidia has gained 83% over the past year, while Microsoft has jumped 31% in the same period. As of July 15, Big Tech stocks comprise one-third of the S&P 500, according to S&P Global.
VettaFi Head of Research Todd Rosenbluth suggests Astoria is tapping into growing yearning for more tax efficiency.
“ETFs in general are a tax-efficient vehicle, so you don’t pay capital gains unless you’re buying and selling,” he said. “This is really focused for people who have a concentrated individual stock position and want to move that in instead of buying an ETF and holding it necessarily the same way.”