00:00351's so hot right now. Maybe you could just give us the quick, you know, 30 to 45 second
00:07explanation of what exactly they are and why we're seeing such an uptick here.
00:13Yeah, so Section 351 is pretty much a century old M&A law that allows seeding new corporations
00:22with existing appreciated assets. And the whole idea was that Congress did not want tax friction
00:28between the initial appreciated assets and funding a whole new corporation. And I think
00:33since 2019, what's happened is that the ETF industry has started adopting this for their
00:38own uses. And so 2019, that was custom basket relief from the SEC. Since then, we've had a
00:44whole progression of white label providers make this super easy to launch ETFs and now toggle on
00:49the 351 in-kind option. And then word is just getting out. Assets have appreciated. And so it's
00:55just a popular rebalancing mechanism. Is this a tool that's just for the wealthiest investors?
01:02No. I mean, what I'm seeing is contributions down to something like 100 or $200,000. And they're
01:08working through their advisors. Their advisors are making the ACAT transfers such that individual
01:14investors are taking advantage of this. Brett, so I want to look at some of the biggest ones that
01:20we've seen come to market. Eagle Capital, Sequoia, Brown, Scharf. These are all above $500 million,
01:27so pretty big. Meb Faber, I think he kicked it off about a year and a half ago. But this
01:31has now
01:32turned into a pretty big situation. How much in assets would you estimate we have seen now? And
01:40do you think we're going to see more? And then let me add a little end to that, which is,
01:43do you think the IRS will look at this at all? Going back to 2021, I see something like 77
01:51individual
01:52ETFs seeded in-kind by individual investors. And that's something like $16-plus billion in launch
02:00assets. So yeah, it's accelerating. Starting in 2024, I think with Meb Faber's public appeal,
02:06that's really what was new about this. 2025, it accelerated with even more funds and assets.
02:122026, we're seeing, I think we're going to surpass 2025 pretty comfortably, maybe by the middle of
02:17the year. So yes, this is still accelerating in a serious way. Is IRS going to take a closer look?
02:22Yes. If there is really aggressive behavior out there, I think it's a good thing that they're
02:27taking a look at some of the transactions that are maybe, you know, subject or suspect and could be
02:34worth another set of eyes so that the rest of the industry can still really enjoy routine
02:40transactions here. Well, to that point, actually, Bloomberg News did report at the end of February
02:44that the U.S. Treasury Department is in early discussions about increasing scrutiny on 351s,
02:50basically considering labeling such conversions as, quote, transaction of interest, which is a
02:56designation for deals that the IRS and Treasury see as having tax avoidance potential. So you mentioned,
03:02you know, if we do see maybe some really high profile examples or some questionable cases, maybe that
03:09scrutiny increases. And with that in mind, I mean, you think that the wealthy investors that are kind of
03:14behind some of these 351s are basically going to become more quiet about what they're doing here?
03:22Yeah. I mean, the ETF is a very public vehicle, as we all know. And that's one of its huge
03:26attributes is that
03:26everything is out in the open, more or less. And so what does that mean? Well, maybe investors who are
03:32trying to achieve tax-free diversification, which is what Congress is really trying to prevent,
03:37maybe investors who are doing that don't use such a public vehicle. And I think that's one thing I'll
03:42see. And then another thing is that maybe Congress passes new law. I mean, it's possible. The next thing
03:48is that regulation could change. We could get clarity on some of the gray spots in Section 351
03:53specifically. And enforcement guidance could change, too. So those are the things that I'm paying attention to.
03:58What can you not do with this 351 conversion, this 351 structure? Could you just put one stock that has
04:06done
04:06super well? Let's say you invested in NVIDIA from the beginning and you wanted to sell it. Could you put
04:10that into a 351?
04:12The short answer is no. Section 351 has got these diversification rules, the 25 percent, 50 percent rules. Just really
04:19quickly. Just make sure that you cannot achieve tax-free diversification. That was Congress's
04:24original intent. Again, talk to your tax attorney about the specifics here. But that's really what
04:28they were trying to prevent. And the famous quote here is tax-free diversification is the perceived
04:34evil that Congress is trying to prevent. And so just don't do that kind of stuff. And then everything
04:39tends to be above board. But you must be already diversified to make that contribution.
04:44So, Brett, you've written about direct indexing. Again, that's when you basically try to copy index on your own with
04:50your
04:50advisor and you buy all the stocks and then they do tax loss harvesting. It seems like these are kind
04:55of like stealing the
04:56thunder from direct indexing, which honestly never got going. Can you talk about the difference between those two avenues?
05:03Yeah, totally. So, I mean, actually, what I'm seeing, Eric, is that a lot of folks will take an appreciated
05:08direct indexing
05:08portfolio. Maybe they've they've squeezed all the tax loss harvesting juice out of it. And now they're taking that
05:14entire appreciated portfolio and they're contributing it back to the ETF wrapper. And so that's really what I'm seeing
05:20there. And you're right on total assets. What do we have in direct indexing now? Maybe maybe a trillion dollars.
05:24All told ETFs growing faster, even though it's a much bigger asset base. So I'm with you.
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