Tax Optimization ETFs: The Rise of 'Black Holes for Capital Gains'

The Twin Oak Active Opportunities ETF (TSPX) launched with a large, concentrated portfolio but quickly replaced its two equity holdings with a S&P 500-tracking fund. The fund received significant inflows and outflows, which allowed it to rebalance without realizing a taxable gain. This tactic, known as a 351 conversion, helps rich investors minimize capital gains tax liabilities. The ETF industry is using this loophole to create funds that can alter their portfolios without incurring taxes, and this tactic is becoming more popular among wealth management firms.