How Alpha Architect Is Keeping 351 ETFs Rolling

If we may amend the list of life’s certainties: Death, taxes and, at least for now, 351 exchanges.

There’s been no shortage of interest from investors seeking to move appreciated stock assets into ETFs while deferring taxes. Alpha Architect, which has been the dominant player in the category, is currently seeding the fourth iteration in its 351 ETF US equity line, and it’s already preparing a fifth. “To the extent that the market wants cheap beta, and there’s enough demand for us to launch these things, we’ll keep doing it,” CEO and co-CIO Wesley Gray told ETF Upside. 

Lower Minimums, More Service

Today, there are no fewer than 77 US ETFs that have been seeded with a total of nearly $17 billion via 351 exchanges, per an aggregated list from newsletter Tax Alpha Insider. Many of those funds were not designed with the sole purpose of attracting investors to the tax-friendly exchange, and the issuers likely offered the service to select clients who were a good fit. Others are ETFs subadvised by RIAs with sizable client accounts that transferred neatly to them, with the plumbing handled by Alpha Architect. That firm manages over $1 billion in assets for the few public-facing 351 ETFs it put its name on, and it has supported numerous products for other firms, Gray said. According to recent regulatory filings, that list includes funds for Ritholtz Wealth Management, Raub Brock Capital Management, Burke Wealth Management, and Cambria Investment Management. 

“We’re basically the only firm in the world that does syndicated 351s,” he said. “It’s a process. You have to have every single independent client sign a piece of paper with the custodian, and they have to sign a representation letter … Cat-herding is a real thing.” A major part of Alpha Architect’s work, though, is helping major asset managers and RIA aggregators. “Most of the business is on the infrastructure side, where we’re launching these for big asset managers and RIAs,” he said.

Alpha Architect has several US equity 351 ETFs on the market and plans for more:

• Its US Equity ETF and US Equity 2 ETF, which launched last year, each represent more than $400 million, while the US Equity 3 ETF, which launched earlier this month, represents more than $300 million.
• The fourth iteration is set to launch July 23, and the firm recently filed a prospectus for the fifth version.
• Alpha Architect lowered its seed investment minimum to $150,000, but only for Charles Schwab accounts. Those custodied at Pershing have a $500,000 minimum, and all others require at least $1 million, Gray said.

Less Certain: The 351 exchange is not by any means mainstream, and use cases range from helping clients reduce their exposure to single stocks that have appreciated (there is a 25% limit by the IRS on any single stock exposure contributed to a 351 ETF) to moving old tax-loss harvesting portfolios. Even if they haven’t used 351s already, advisors can have them at the ready for specific clients who make a good fit, said Matt Nelson, managing partner at Perspective 6 Wealth Advisors. “We’re going to have the perfect scenario come up and will deploy it,” he said. 

Still, there are concerns about the negative attention 351s have received in the media and scrutiny they may face from regulators and members of Congress, Nelson said. But regulators clamping down on bad actors will help the business, Gray said. “It’s good that the IRS is poking around a little bit,” he added. “We want them to, if people are going around the intent of a law.”