Section 351 transactions are drawing interest beyond specialist tax and investment circles. At the ETF Oasis session during the Future Proof event on October 7, ETF.com President and Head of Research Dave Nadig spoke with Alpha Architect President Ryan Kirlin about eligibility, portfolio conversion, costs and the strategy’s role in wealth management. Kirlin said some clients have switched financial advisers because their advisers were unfamiliar with the transactions.
How Section 351 can turn a portfolio into one ETF
Kirlin stressed that Section 351 conversion is not suitable for every portfolio: investors must meet the requirements set out in current rules. When those conditions are met, an existing portfolio can be converted into a single ETF ticker, replacing individual holdings.
The transaction does not erase accrued capital gains. Its primary tax benefit is to defer recognition of those gains. Kirlin said two common reasons investors consider the approach are to reduce a highly concentrated position in one stock over time, or to find an exit route from a direct-indexing portfolio held for many years.
Long-term direct-indexing investors can be particularly interested. Some have fewer loss positions available to offset gains, leaving less room to manage the portfolio’s tax impact. A Section 351 transaction can move existing assets into a more standardised ETF structure while preserving the deferral of gain recognition, subject to the applicable rules.
Alpha Architect charges 9.45 basis points
Alpha Architect positions itself as a low-cost provider in the space, with exposure focused on U.S. large-cap blend equities. Kirlin put typical direct-indexing fees at 15 to 40 basis points, compared with 9.45 basis points for Alpha Architect’s offering. He said the strategy is aimed at investors who have accumulated wealth and ultimately want a portfolio similar to an S&P 500 investment.
The current minimum investment on the Schwab platform is $150,000. Kirlin said Alpha Architect has handled roughly one-third to one-half of the Section 351 market, which he estimated at about $5 billion. That share points to a market where activity remains concentrated among firms with the necessary processes and technology, even as interest extends beyond a small group of tax and investment specialists.
Software checks holdings and prepares paperwork
Alpha Architect has built the process into a four-step software tool. It first checks whether the assets in an account are eligible, then calculates the resulting portfolio weights, prepares the paperwork and collects account information. Kirlin said the steps take about 20 minutes once users are familiar with the process.
The asset transfer also requires planning. Alpha Architect says assets earmarked for conversion move to U.S. Bank two days before the ETF is issued. Clients should expect the assets to be out of their original account for up to seven business days, although they remain invested during that period. The time required, account restrictions and assets that can ultimately be included depend on the portfolio and the transaction’s terms.
For investors, the central point is that a Section 351 transaction changes the structure of a portfolio; it does not permanently eliminate tax liability. Fees, the minimum investment, the temporary asset transfer and eligibility requirements are key details to verify when assessing whether a conversion is available for a particular portfolio.