Tax Efficient Investing

Concentrated Stock Risk, Tax Drag, and a Smarter Path Forward.

Investors with concentrated stock positions face a frustrating paradox: stay exposed to high single-stock risk or trigger steep capital gains taxes by selling. But what if there were a third option—one that preserved wealth, enhanced diversification, and maintained tax efficiency? That’s the vision behind the strategic partnership between Alpha Architect and Cache. Together, we’re working to reshape the way sophisticated investors and advisors approach concentrated equity positions—making advanced tools more accessible, transparent, and investor-friendly.

What Is an Exchange Fund? A Way to Diversify Without Triggering a Tax Bill

Investors with large, concentrated stock positions often find themselves stuck between a rock and a hard place. On one hand, holding on to a single stock position exposes them to unnecessary risk. On the other, selling that stock can mean paying a hefty capital gains tax bill. What most investors don’t realize is that there’s a third option—a relatively obscure yet entirely legitimate strategy that can help diversify away single-stock risk without triggering immediate taxes: exchange funds.

Portfolio Tax Strategies: Section 351 vs. Exchange Funds vs. Long/Short Tax-Loss-Harvesting

Three powerful strategies may help investors diversify concentrated positions while deferring or minimizing immediate capital gains taxes: ✅ Section 351 transactions (often used to seed new ETFs) ✅ Exchange funds (offered by firms like UseCache and traditional private banks) ✅ Long/short tax loss harvesting strategies (offered by firms like AQR or Quantinno using active trading to generate offsetting losses)

Adding Leveraged, Long-Short Factor Strategies to Improve Tax Alpha

Joseph Liberman, Stanley Krasner, Nathan Sosner, and Pedro Freitas, authors of the September 2023 study “Beyond Direct Indexing: Dynamic Direct Long-Short Investing,” examined if the utilization of leverage and long-short strategies motivated by the literature on factor-based investing could improve on the tax benefits of direct indexing and tax-loss harvesting.

Factors and Taxes

As a result of the trading required to capture the premiums that drive factor strategies investors may face significant tax liabilities. The challenge for the [...]

Transitioning from an ETF to Direct Indexing? Bad Idea.

Many investors face the complex decision of whether to transition from a diversified ETF to direct indexing. When is this switch a poor investment choice? My findings suggest that many investors are better off avoiding it. Direct indexing remains attractive even with a decent amount of embedded capital gains, up to approximately 40% of initial investment, for investors in the highest marginal income tax bracket.   However, for lower-tax investors with a marginal income tax rate of 22%, ETFs often prove more advantageous: when embedded capital gains exceed 10%, a consumption-focused investor is better off staying in an ETF.  While the other benefits and costs of direct indexing are difficult to quantify, my results indicate that it is far from a universal solution. Investors with high embedded gains and lower tax rates should approach direct indexing cautiously.

Doug Talks with Belle about 1042 QRP ESOP Solutions

In this episode host Belle Osvath, CFP® talks with Doug Pugliese who is the Head of 1042 QRP Strategies at Alpha Architect. They discuss 1042 exchanges which allow the owner of a closely held C-Corp to sell their equity to an employee stock purchase plan and defer long-term capital gains as long as they rollover the proceeds into a qualified investment. Doug talks about the benefit to a company and the employees when creating an ESOP and does an excellent job at breaking down the strategy behind the decision. Doug also identifies which business owners are ideal candidates for this type of exchange and discusses the limited investment options that business owners have historically faced and how his team is working to change that. If you have business owner clients our are just curious about this innovative approach to 1042 exchanges this is the show for you.

Wes Talks with Belle about Creating Your Own ETF

In this episode host Belle Osvath, CFP® talks with Dr. Wesley Gray the founder of ETF Architect and Alpha Architect, about how advisors can create their own ETFs which can be used to help manage client funds and taxes. They discuss the creation process, the cost, and what type of advisory practice would benefit the most from their own ETF.

Mutual Fund to ETF Conversions: To Proxy or Not to Proxy, that is the question

ETF conversions are accelerating and we are seeing more and more mutual funds converting into ETFs. The reasons for mutual fund to ETF conversions are obvious: tax efficiency, transparency, and lower operating costs. But how does this work? What are the pro/cons? This post provides a glimpse behind the curtain and a practical guide for any asset manager considering a mutual fund conversion. Below we outline the laws behind a mutual fund conversion, options for mutual fund conversions, and the nitty-gritty behind how to optimize a mutual fund conversion.

Why Advisors (and Family Offices) Should Consider Creating their Own ETFs

Independent RIA firms seek to do what is "right" for the client, which often boils down to minimizing fees and taxes and increasing transparency/education (i.e., ETFs). But the "right" solution for an advisor's clients might not be available 'off-the-shelf' in the ETF market, or the advisor can't use ETFs because they are stuck "managing around" legacy portfolios and tax problems.

What's the solution? Allow advisors to create their own ETFs, which can be customized to deliver the specific investment program the advisor desires and allows an advisor to offer unique solutions for legacy tax issues tied to low-basis securities.

Life Insurance Instruments May Help Improve After-Tax Wealth

Fee-only fiduciary advisors often summarily dismiss the use of life insurance solutions as financial planning tools—perhaps due to past experiences trying to get clients out of poorly structured, high expense policies. In this post, Colva Actuarial Services and Colva Capital principal Rajiv Rebello explains how fiduciary advisors can properly structure life insurance products and utilize low-expense/no-commission products to provide better after-tax diversification and returns for the fixed income portion of their clients’ portfolios as opposed to investing in bonds directly.

ETF Tax Efficiency isn’t Always Efficient

Compared to mutual funds or separately managed accounts, ANY benefit from redeeming in-kind is a bonus. That being said, not all ETFs and situations are created equal when it comes to tax efficiency, and the "golden rule" always applies - when given the option, the IRS wants to create scenarios where they receive tax dollars now instead of later. Here are some big-ticket items that cause inefficiencies (read as taxes…), many related to the “golden rule” above.

How to Start an ETF? Resources and FAQ

We get the following question at least 1x a day: "How do I start an ETF? Because we have so many requests for information on the topic of "How to Start an ETF?", Wes asked that I compile a list of materials on the topic and a "FAQ" to address all of your burning questions.

Are You Ready to Become a Better Investor?

Important Disclosures

Performance figures contained herein are hypothetical, unaudited and prepared by Alpha Architect, LLC; hypothetical results are intended for illustrative purposes only. Past performance is not indicative of future results, which may vary. There is a risk of substantial loss associated with trading stocks, commodities, futures, options and other financial instruments. Full disclosures here.

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