Just got an email from an outside advisor that one of the funds in which I am invested (in a taxable account) will likely soon be converting into an ETF. I have not heard if my total fees will change if and when this occurs, but I have a phone call scheduled to discuss this. In addition, the email states that:

"We expect this to be a non-taxable event for existing shareholders, except for fractional shares, which will be redeemed prior to the conversion. In addition, we anticipate paying an income distribution prior to the conversion date. Shareholders of record as of May 22, 2025, will receive proxy materials with full details.

Alongside the conversion, there is an opportunity for clients to participate in a Section 351 Exchange. This one-time opportunity will allow clients to transfer in-kind a portfolio of appreciated securities into the new ETFs without triggering immediate capital gains. It is a unique chance to transition into products that we believe have historically exhibited much lower downside than major indexes.

This structure is similar to exchange fundsbut with greater liquidity and lower costs, making it an attractive planning tool for taxable portfolios."

Other than if and how my fees will change, what are some of the upsides and downsides to this strategy, plus or minus any pertinent questions I should be asking the advisor at the time of our conference? Also, why do ETFs "have historically exhibited much lower downside than major indexes."?

Many thanks

I believe they are referring to the specific ETF strategy being lower volatility, not ETFs in general.

Make sure you understand if it is a 7 year lockup, like a typical exchange fund (if contributing securities). Also, your yield is likely that of the portfolio, not your prior holdings. Will they reject some securities, or limit some securities being contributed?

You're giving up your current holdings to get a share of the new holdings at your old tax basis. If you really want to make the exchange without considering taxes, this could make sense. I would want to know how my return is being calculated. As Casey says, you could be contributing an asset yielding 10% in exchange for an asset of the same value yielding 4%.

I think those assets then have carryover basis to the fund, so they could sell them and distribute capital gains right back to you. Seems like a weird thing for the fund to offer unless they're just hoping to get AUM numbers up.

Casey TableTennis said:

---

I believe they are referring to the specific ETF strategy being lower volatility, not ETFs in general.

Make sure you understand if it is a 7 year lockup, like a typical exchange fund (if contributing securities). Also, your yield is likely that of the portfolio, not your prior holdings. Will they reject some securities, or limit some securities being contributed?

---

No lockup period with the ETF. Additionally, there are not any securities that I currently hold with the firm that they would reject from the new ETF, according to the advisor. And my cost basis of any securities I rolled in would remain the same.

Interesting. While performing diligence on direct indexing solutions a while back, it became apparent the tax loss harvesting would erode over time, and I would need an exit plan. These exchange ETFs seem like the only potential answer other than hold until death or sell and pay taxes.

Appreciate you sharing some insight on how this one worked.