Poof. Where did the tax go?

For their next trick, issuers are turning to a strategy to help seed new products: the 351 exchange, which allows stock portfolios with years of appreciation to be transferred to ETFs without triggering capital gains taxes. But it’s not just the likes of Alpha Architect, Cambria and other shops that have made a point of focusing on 351s. Asset managers are increasingly incorporating the 351 exchange into new ETFs that aren’t specifically marketed for the capability. Advisors should expect to see this much more frequently.

“It’s not something they’re marketing or advertising as a business,” Morningstar associate director Daniel Sotiroff said. “It’s an option they have if they want to launch a new strategy and get it off the ground.”

The Big Money Wins

Over the past couple of years, a handful of asset managers have rolled out 351 exchange ETFs that have had initial investment minimums of $1 million or more. But recently, Alpha Architect added a fund that went as low as $150,000, only for accounts held at Charles Schwab (Fidelity accounts, by contrast, had a $5 million minimum for that fund). In any case, it’s likely that the firms specializing in 351s are moving downmarket, and the tax strategy could be available for smaller accounts. However, the asset managers that have added 351 exchange provisions in several yet-to-be-launched ETFs do not specify the investment minimums for seed money.

Some of the firms prepping funds with 351 provisions:

• Ritzholtz Wealth, whose forthcoming Goaltender ETF (GTND) will be its first exchange-traded fund.
• Polen Capital, which has filed for a US SMID Cap Growth ETF and 5Perspectives Growth Opportunities ETF, each of which appears similar to existing non-ETF strategies the firm manages.
• Cloverpoint Capital, which filed with the Securities and Exchange Commission for four funds: the Core Alpha US, International, Global and Energy Transition ETFs.

Perhaps the most notable firm to launch an ETF seeded in part via 351 exchanges is American Century’s Avantis Investors, Sotiroff noted. That firm’s Total Equity Markets ETF (AVTM) started trading in late January.

Tread Lightly on This One-Time Event: The rise in 351 exchanges hasn’t escaped attention from Congress, which could restrict them in the coming years. The US Treasury is also considering issuing guidance on such exchanges, according to a report by Bloomberg. The exchanges, which make use of a century-old tax rule, can also be flagged by the IRS, as illustrated by a recent paper on the subject. Further, investors should be fully aware of how the ETF’s strategy may be significantly different from the concentrated stock investments they are transferring, as well as confident that the seeded ETF will gather enough assets to be viable, Sotiroff said.

“You’ve got to make sure the strategy of the ETF vehicle is actually something you want and are willing to hold over the long run,” he said. “You might wind up with something that is very different from what you were doing before.”

The first day of spring isn’t until Friday, but one firm is already doing some seasonal cleaning.

Direxion is closing and liquidating 10 exchange-traded funds that just didn’t catch on. That might seem like a lot, but the company launched 25 ETFs last year and is currently prepping more. Product development has ramped up in the industry to what has become a ridiculous pace, as companies test out products for nearly anything and everything, including funds focused on single stocks, leverage or income. Choose your metaphor: there’s the classic spaghetti thrown at a wall; a handful of darts aimed at a dartboard; or fecundity across the animal kingdom.

Sorry to be a bummer here, but only one in 10,000 sea turtles that hatch are likely to make it to adulthood. Maybe ETF survival rates don’t look so bad.

More and More

Last year, asset managers launched more than 1,000 US ETFs, nearly double the 584 that debuted in 2024, per a report from Morningstar. Of last year’s class, all but 150 ETFs were actively managed. Here’s a look at the biggest issuers of 2025:

• GraniteShares launched more than any other issuer at 71 ETFs.
• Themes was second at 63.
• Defiance was not far behind at 59.

Direxion, with its 25 new ETFs, clocked in at 10th. Meanwhile, 146 ETFs closed last year. The Direxion funds are scheduled to liquidate around April 17.

Not Enough Lifeboats: With the extreme pace of ETF launches across the industry, it seems all but certain that more will end up like Leonardo DiCaprio’s Jack Dawson at the end of Titanic (sorry if that’s a spoiler, but y’all have had 29 years to watch it). For Direxion’s part, the firm constantly evaluates its products to reflect what ETF traders need, chief product officer Mo Sparks. “The decision to close 10 ETFs is part of that ongoing review process and represents a small portion of our overall lineup,” he told ETF Upside in a statement from the company. “We remain focused on providing sophisticated traders with the right tools to navigate evolving market opportunities.”

This issuer is seeing whether it pays to be altruistic.

With Autism Appreciation Month only two weeks away, Defiance ETFs is set to launch a fund that invests in companies providing products, services or research in the autism ecosystem, according to SEC filings. The holdings will include medical research and pharmaceutical firms, companies developing AI tools that monitor and assess autism and businesses that build education systems for neurodivergent learners. However, the goal of the fund appears to be more than capitalizing on the biotech and medical industries.

For its first two years, Defiance will donate all net advisory profits from the fund to autism-focused nonprofits. After that, the minimum donation will remain at 50% of advisory profits, an unusual move in an industry where ETFs typically operate on thin margins. It’s not the first fund to donate profits, said James Seyffart, senior research analyst at Bloomberg Intelligence. “It’s for a good cause and I hope they’re successful, but it’s going to come down to whether they can raise assets,” he told ETF Upside. “At the end of the day, it’s still a fund, it’s still a business and they’re still going to have to raise capital.”

For a Good Cause

Expense ratios for passive ETFs are often low, ranging from no fee at all for broad market funds like the BNY Mellon US Large Cap Core Equity ETF (BKLC) to 0.25% for more industry-specific products. The funds live and die by how much they scale, so to part ways with any profits is quite a choice. Though a short list, the Defiance ETF is the latest example of a fund with a philanthropic element at its core:

• The Simplify Health Care ETF (PINK) is 100% pro bono, donating all of its profits to breast cancer research each year. Its returns have gone up roughly 14% in the past 12 months, outpacing the Dow.
• The Green Century Balance Fund (GCBLX) is a mutual fund that invests in companies with a focus on environmental, social and governance issues. The fund is owned by several nonprofits, so all the earnings from the GCBLX go back into their missions.

The philanthropy is both a marketing and altruistic strategy, Seyffart said. “[Defiance] doesn’t have to donate the money, but they are.” See, it’s not always about the money.