Personal Investments • Does anyone here have experience with Exchange Funds for capital gains avoidance

You take individual equity positions you have that have large capital gains and rather than sell them, you exchange them for a managed index fund and do not have to sell and realize capital gains

You do not get a step up in basis, but you get the benefit of avoiding selling the individual stocks and paying capital gains to then reallocate into an S&P500 or other index fund

I have some significant gains in some stocks I hold that would make this appealing

So for example:
Let's say I own
$500k of Apple ($100k cost basis / $400k gain)

Using the Exchange Fund, I would "swap" my $500k of Apple for a managed fund that tracks the S&P500 and have $500k in that fund. My cost basis is still my original $100k but I have diversified out of that large individual position. The downside is that the fund I am looking at charges a 0.85% expense ratio.

The alternative of course would be to sell the $500k of Apple, pay capital gains, and then invest that in a lower expense ratio ETF

Does anyone have any experience with these? Any thoughts on them would be helpful.

I'm interested to hear what you ended up doing. I don't think you ever got a complete answer so I wanted to share some thoughts for people that read this in the future since I have experience with exchange funds (both when it's worked and when it hasn't).

In my eyes, the major benefits of using an exchange fund are:

1. Immediate diversification - I think we all understand the importance of diversification here so I won't go overboard. It's important to note that not all exchange funds mirror an S&P 500 index. Some now do a NASDAQ 100. Additionally, since the funds themselves can't rebalance, after 7 years the fund will look quite a bit different than the index it was originally meant to track.
2. Tax avoidance - Avoiding taxes now if you're in a high tax bracket is a major benefit. Same goes for if you're in a state with high income tax and expect to move to another state in the future that has lower income taxes.
3. Growth on taxes you're avoiding - By avoiding taxes and diversifying, you'll be able to grow your portfolio a little more quickly since you're avoiding a tax drag.
4. Have more time to time taxes - With concentrated positions, it's really difficult to make a several-year selling strategy. With a diversified exchange fund, you don't feel the same pressure to sell everything all at once. Since you'd be better diversified, you'd be able to be patient in optimizing your tax situation, which normally isn't feasible.

Tax planning is a huge driver as to whether or not using an exchange fund is worth it, so running a few tax scenarios can help you see if it's worth it.

We built out an exchange fund calculator specifically for this sub if you want to give it a try.

https://docs.google.com/spreadsheets/d/ ... sp=sharing

As far as times when exchange funds don't make sense, there are many.

1. Usually not worth doing any exchange fund with "only" $200k of gains
2. Tough to make the math work if the fees are 1-2% (advisors offering exchange funds love to hide fees so be sure to get absolutely everything)
3. If you're in a low tax bracket now
4. If you're going to be in a higher tax bracket in 7 years
5. You don't have the ability to wait the full 7 years

We wrote an article on Exchange Funds earlier this month that basically dives into most of what I shared here (link below). Exchange funds can be powerful tools, but sometimes they're just a sales pitch to get AUM in the door.

https://www.equityftw.com/articles/when ... hange-fund

I am in the highest federal bracket and the highest state tax bracket in the country and had more than $600k of gains in this position, so I went for it. The fees are under 1% on my fund. It’s accomplished what I wanted it to, but it turns out (so far) that stock I exchanged has outperformed the index thus far, although for a while the reverse was true.

Thanks for the info. I will give it a read.

Can you share what company you went with? Also were there any "onboarding fees"? Is the fund you were 'exchanged into" an actual S&P fund or is it a mix of a bunch of companies?

Goldman Sachs all cap exchange. It tracks the Russell 3000. No onboarding fees.

Statistics: Posted by xiangg_li — Tue Sep 03, 2024 4:23 pm — Replies 24 — Views 5420