Changing your mind is hard, but it’s a sign of maturity and openness to new information… Especially, when there’s money to be made.

Vanguard appears to be reevaluating its stance on crypto ETFs, which the financial giant famously has not allowed on its brokerage. That’s according to industry newsletter Crypto in America, which cited an anonymous source familiar with the company’s plans. The potential change follows demands from clients for access to crypto ETFs and developments at the US Securities and Exchange Commission, which has dramatically changed its stance on crypto, the publication noted.

Vanguard indicated an openness to adding products in a statement to ETF Upside, a significant change in posture, but neither confirmed nor denied the report. “Today, cryptocurrency mutual funds and ETFs are generally not available for purchase on the Vanguard brokerage platform, but we continuously evaluate our brokerage offer, investor preferences and the evolving regulatory environment,” a spokesperson said. “If and when a decision is made, clients will hear directly from Vanguard.”

Close with Crypto

It’s notable that Vanguard CEO Salim Ramji came from BlackRock, where he oversaw the introduction of numerous iShares ETFs to the market, including the biggest crypto exchange-traded product on the planet, the now $84 billion iShares Bitcoin Trust ETF. While Ramji last year said that Vanguard did not have plans to pursue its own crypto ETFs, he was less dismissive of adding third-party products on the brokerage side, Crypto in America wrote.

Vanguard has several potential routes to adding access to crypto, according to Jeff DeMaso, editor of the Independent Vanguard Adviser:

• It could allow most crypto ETFs on its platform.
• It could limit most or all of them, contending that, like leveraged ETFs, crypto “doesn’t have a role to play in investors’ portfolios.”
• It could greenlight select crypto ETFs, like spot Bitcoin, but avoid others it deems too speculative.

Fool’s Gold? It’s an easier argument for Vanguard to walk back its stance on excluding crypto ETFs from the brokerage than it would be for the firm to reconsider crypto products of its own, DeMaso said. And part of that is the company’s view on crypto, such as whether it buys into the idea that Bitcoin is digital gold. “If it’s gold 2.0, well, Vanguard lets you buy gold ETFs (like GLD), so why not allow bitcoin ETFs?”

Where did the capital gains go?

An ETF tax trick for wealthy investors has been snowballing this year. So-called 351 exchanges, which let investors transfer assets from other holdings in their portfolios and defer (or ultimately avoid) capital gains taxes, are popping up in an expanding menu of exchange-traded funds. The latest choice is from Cambria Investment Management and is the third such fund it has added to its line. The Cambria Global EW ETF (GEW) launched last Thursday and had attracted $150 million ahead of its debut. The company’s prior two 351 exchange ETFs, the Tax Aware ETF (TAX) and Endowment Style ETF (ENDW), garnered $30 million and $100 million leading up to their respective launches.

“My expectation for the next one is going to be many multiples of this current one,” Cambria founder and CIO Meb Faber said. Industrywide, “the end of this year and Q1 of next year will be the dam breaking on assets.”

Everywhere All at Once?

The 351 exchange strategy isn’t new, but it has taken off recently beyond the quietly debuted products RIAs and family offices tailored to their clients. The tactic hadn’t been advertised and only existed in recent years to give investors a convenient way to move assets without triggering capital gains taxes. This year, several ETFs have come out, and there is more attention, both among proponents and those concerned about a potential tax loophole. Sen. Ron Wyden, D-Ore., for example, introduced a bill designed to prohibit such asset transfers, though it faces slim odds in Congress.

“It seems that there is no limit on the investment strategies whose after-tax returns cannot be improved by undertaking them in an ETF,” Jeffrey Colon, law professor at Fordham University of Law, wrote of the ETFs used as swap funds, in a paper published over the summer. “[A]n ETF investor obtains an after-tax result that could not be obtained had the investor carried out the investment strategy directly. This is the essence of an inappropriate tax arbitrage.”

So far, there are at least four 351 exchange ETFs available, though they have required investment minimums for seeding, according to Morningstar Direct and company data:

• The $31 million TAX, $122 million ENDW and the new $150 million GEW, from Cambria.
• The biggest, the $476 million Alpha Architect US Equity ETF (AAUS), which launched in July.
• Cambria is planning another launch in December, the US Equal Weight ETF (USEW), and Alpha Architect, which partners with Cambria for that firm’s ETFs, is adding its second, also in December called the US Equity 2 ETF (AAEQ).

351 Ways to Leave Your Direct Indexer: The tax-deferring (or eliminating) strategy feels new to most, even many seasoned advisors, Faber said. The 351 exchanges are still in the early adopter phase, but he expects that to change, particularly as people look for “an offramp” from direct index portfolios. A big change would be for the major broker-dealers to approve 351s, he noted. “As there is more history and more assets and as the process gets more efficient and built out … it unlocks more doors,” he said. “And each of those doors is exponential, next-level on assets.”

Hedge fund products might not be so exclusive anymore.

Man Group, which oversees roughly $43 billion in assets in the US, entered the ETF race earlier this month with two active bond ETFs, the Man Active High Yield ETF (MHY) and the Man Active Income ETF (MANI), which will invest, respectively, in junk bonds and debt instruments including corporate, government and securitized notes. Several other firms have launched or sought SEC approval for their own strategies in the past year, a sharp departure from typical offerings geared toward sophisticated or institutional investors. Man Group’s move reflects the ongoing popularity of active strategies, and fund managers believe that, despite lower fees, ETFs can bring in new clients.

“It makes sense from a commercial standpoint that you’re seeing some of these firms try to broaden out their investor base,” said Andrew Daniels, Morningstar’s director of equity strategies. “I don’t think that’s going to slow down.”

Over the Hedge

Bridgewater Associates has also joined the ETF fray, repackaging its diversified “all-weather” strategy as an ETF earlier this year. The challenge for Bridgewater, Man Group and others will be standing out from the crowd, Daniels said. Another risk is cannibalizing their existing funds. “If you have a product that’s extremely similar or the same as something you already have at a lower cost, why would a client not go with that cheaper option?” he added. Other recent ETFs linked to hedge funds include:

• The large mid-cap company-focused Tremblant Global ETF (TOGA), whose launch in May of last year made Tremblant Capital one of the first hedge fund shops to bring an active ETF to market.
• Five ETFs focused on financial, small- and mid-cap stocks from Baron Capital, which filed for SEC approval last month.

Earlier this month, Tremblant was named the sole advisor for Vanguard’s mid-cap growth fund, VMGRX, which has roughly $3 billion in assets. The decision was “a huge win” for Tremblant and provides another example of how hedge funds are diversifying from traditional lines of business, Daniels said.

Trades and Tradeoffs. Hedge funds have historically offered actively managed products with very high fees only to accredited investors, but the shift toward ETFs reflects an ongoing effort to democratize private investments. “For a lot of these hedge fund firms, there’s a tradeoff because the fees are going to be higher in the traditional space,” Daniels said. “They’re making the calculation that with lower fees and the ETF wrapper, they can [grow] their investor base.”