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. Those funds, however, have made trades among underlying ETFs tracking different indexes, while the IRS notice calls out same-index substitutions.

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.”

Editor’s note: This story was updated to add context about the F/m Investment ETFs identified.

Who’s calling the shots?

Last week, REX Shares launched the REX Peptide ETF (PEPT), which holds companies (including pharma giants Eli Lilly and Novo Nordisk) that develop and manufacture peptide products, like GLP-1s. AdvisorShares has filed for a competing product, the Peptide and Human Enhancement ETF. There is a growing list of products that try to cash in on the wellness zeitgeist — but much as with GLP-1 users, appetite may be suppressed.

“This all started with the broader interest in peptides that has come both from the GLP-1 revolution as well as the more tongue-in-cheek, gray market peptide stuff that you see on social media,” said Bill Birmingham, head of research at REX Financial. “We found that there are many companies that sit outside of the Lilly/Novo duopoly that are starting to emerge with treatments for other big diseases.”

Wellness Dot Com

The global wellness industry is a $2 trillion market and growing. As the boomer generation ages, more people need healthcare, and Gen Z and millennials drive 41% of US spending on wellness, despite only making up 36% of the adult population. “Investors are starting to look at healthcare more as a modern consumer, tech-type” investment, said Sylvia Jablonski, CIO at Defiance ETFs. “Healthcare is now this convergence of biotech, med tech, pharmaceuticals research and the internet.”

There are already a handful of funds riding the wellness wave:

• Tema has the Heart & Health ETF (HRTS), which invests in companies focused on chronic disease treatment and prevention. The fund is up nearly 7% this year with about $55 million under management.
• Defiance has several single-stock leveraged ETFs focused on companies in this space, like the Daily Target 2X Long HIMS ETF (HIMZ), with about $58 million under management, and the Daily Target 2X Long NVO ETF (NVOX) with about $39 million in assets.
• GraniteShares is prepping several single-stock leveraged ETFs focused on Strava, Oura and Whoop (which does wearable health tech). ProShares and Themes ETFs have filed for Oura funds as well.

All Quiet on the Wellness Front: Despite the impossibility of existing in the world without hearing the word “wellness” at least once a day, flows haven’t quite matched the hype. HRTS has lost $2.5 million this year, HIMZ has net inflows under $1 million and NVOX has a year-to-date outflow of $34 million, according to ETF.com. “Healthcare is seen as a little boring in a bull market,” said Yuri Khodjamirian, CIO at Tema. Still, investors shouldn’t write it off, he said. If “you look at next year’s earnings forecast by sector, healthcare is number two in terms of earnings growth after tech. … It’s defensive, it’s growthy and there’s a valuation opportunity, because people have kind of forgotten about it.”

Birmingham said he sees this as an opportunity. “I’d rather launch into a quiet equity market from a price perspective on these names than put something in at the top,” he said. “You don’t have to battle through stocks going down and coming back up again.”