IRS, Treasury Cast Doubt on Dividend-Skipping ETFs’ Future

It’s not over — but it might be the beginning of the dividend.

The small number of dividend-avoiding exchange-traded funds suddenly face an uncertain future, with possible restrictions on such strategies forthcoming from the IRS and Treasury, which have indicated they are examining “potentially abusive” tax strategies. Dividend avoidance is a relatively new spin on the ETF format, with several products in the US offering exposure to securities but avoiding dividends (and their tax consequences) by trading in and out of underlying ETFs at the right time. One such fund, the LionShares U.S. Equity Total Return ETF (TOT), is slated to close and liquidate next week, after having been on the market for just over a year. It’s unclear if that is connected to the recent IRS and Treasury notices, but the announcement of the fund’s closure came several days after them.

“It’s not uncommon for smaller funds to shut down within a year,” said Daniel Sotiroff, associate director of manager research for Morningstar. “The thing that’s interesting is the timing.”

Trading Places

At less than $11 million, the LionShares fund is indeed relatively small, and that may also be a factor in why it is closing (the company did not respond to requests for comment). It had turnover of over 380% last year, as it rotated between single ETFs that represented nearly 100% of its portfolio, Sotiroff noted. Currently, it’s invested in the iShares Core S&P Total U.S. Stock Market ETF (ITOT). 

There would seem to be demand for such a strategy. For years, there has been a reliable pattern where tens of billions of dollars move between the iShares Core S&P 500 ETF (IVV) and Vanguard S&P 500 ETF (VOO), timed ahead of the record dates for distributions, per Bloomberg’s reporting. That appears to be a strategy overseas investors have used to avoid a 30% tax on dividend income.

“[IRS] Notice 2026-62 is a clear warning shot, not a final determination for these funds,” Aisha Hunt, founder of law firm Kelley Hunt, told ETF Upside. “Treasury and the IRS have identified the precise strategy — using in-kind redemptions to rotate between ETFs with materially the same exposure around dividend record dates — and signaled that the intended tax result may be challenged. But the notice does not require funds to change course today.”

Other US ETFs that avoid distributions for tax purposes:

• Roundhill’s S&P 500 Accumulating ETF (XDIV), which represents $99 million and launched in July 2025.
• F/m Investments’ Compoundr High Yield Bond (CPHY) and Compoundr U.S. Aggregate Bond (CPAG) ETFs, which represent $3 million and $150 million, respectively, and launched in August 2025.

All’s Well That Dividends Well: The IRS and Treasury are collecting comments through Oct. 28, and while they have indicated that they don’t want to disrupt established market practices, dividend-avoiding funds have an uncertain future, Hunt said. “Even so, the risk is no longer theoretical: The notice leaves open examination challenges under existing law and future guidance that could reach prior transactions.” That means that fund advisors, boards and their tax counsel need to reassess disclosures and costs, among other things, she said. “If future guidance curtails the intended treatment, funds may have to make distributions, redesign the strategy or conclude that the product no longer works commercially.”