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An ETF that offers investors the ability to replicate the return of a 1-3 month Treasury bill index but pay deferred long-term capital gain rather than income tax as an alternative to municipal bond funds.
It combines derivatives with in-kind trading features of the ETFs to avoid distributions. So, one buys it and then pays CGs only on sale. ER of 19.5 bps is OK. While remarkable, it looks lot of complicated work to achieve approximately the m-mkt returns.
I too read the article. Two things that come up: 1. The etf vs mutual fund tax dodge must be glaring to the politicians in Washington looking for tax dollars. It’s gone on for too long. The implications if the tax dodge is equalized runs through every single fund and so the bucket has been kicked until it won’t.
2. Investing in t bills is taxed only federally. Incurring long term capital gains incurs federal long term tax and in high tax states also ordinary income (it does for NYC and California). So the “arbitrage” of the tax dodge needs some very particular characteristic at the individual level depending on one’s tax brackets. These are questions best reserved for @msf to educate us on.
My thought is boxx works for NOW for small sizes. Maybe @msf or others can verify.
I took a brief look at this last night and have to read more about how the mechanism works, associated risks, etc.
1. One man's tax dodge is another man's smart investing. In theory, ETFs don't have an advantage over mutual funds - the statute that makes cap gains disappear in a puff of smoke (via in-kind distributions) originally applied to corporations as well as mutual funds. Decades ago it was rewritten, maintaining the break for mutual funds while excluding corporations from this benefit.
This all happened before ETFs existed. ETFs benefit because they just happen to be a form of mutual fund. In practice, ETFs have the advantage because they redeem shares in-kind, while OEFs rarely do so.
That said, my personal feeling is that this dodge "provides an unfair tax subsidy for ETFs and encourages the transfer of capital from other kinds of investment vehicle to ETFs." This has got little to do with Washington scrounging up extra dollars - a fix could be revenue neutral. IMHO it's a matter of providing a level playing field.
There are lots of loopholes begging for attention, such as carried interest. And one that seems to curry favor here - unrestricted Roth conversions - a way of getting around income restrictions intended to limit tax benefits that higher earners receive. As the saying goes, it all depends on whose ox is being gored.
2. NYC is unusual in that it has both a high tax rate (combined NYS + NYC) and that rates go up pretty fast with income. This combination makes it quite possible for one to owe more taxes if the income is treated as cap gains (state/local taxable) than if it is treated as Treasury interest (ordinary tax, but only at federal level).
For example, in 2023 a couple with taxable income of $90K would pay 22% on ordinary income and 15% on cap gains. That 7% savings by treating the Treasury interest as cap gains would be more than offset by an added NYS tax of 5.5% plus a NYC tax of 3.876%.
Now this assumes that the taxpayer can't deduct the NY taxes due to SALT limits on deductions. That may change in 2026. In this particular example, even with a SALT deduction (worth 22% x 9.376% or about 2.06%), one would still pay more in net state and local taxes (7.3%) than one would save in fed taxes (7%). But it is close and one can easily conceive of other brackets where deductibility of SALT would make a difference.
In California, look at a couple with taxable income of $110K. As with the $90K NY couple, they'd be paying 22% fed tax on ordinary income and 15% on cap gains - a 7% difference. At the state level, they'd be paying 0% on Treasury interest but 8% on cap gains. Same problem.
This transmutation of Treasury interest into cap gains works very well for high earners - where the cap gains rate (even at 20%) is well below the fed rates of 35% or 37%. Of course it also works well for the hoi polloi in states with low or no local income taxes.
"If the BOXX ETF grows so large and attracts so much attention that it precipitates a change in the rules governing ETF taxation, the result would be a tremendous and lamentable decrease in investor welfare. We truly hope our worries are misplaced."
NYU law professor Daniel Hemel digs deep into the mechanics of the ETF BOXX and the fuzzy areas of tax laws (sections 1258 and 1092) that its tax deferral claims to exploits. He thinks that eventually there would be an IRS clarification or challenge that would negate much of the tax angle of BOXX. So, the play may really be whether the holders of BOXX will be grandfathered.
All this fancy footwork just to create money-market or T-Bill returns? But investors love new black-boxes.
All this fancy footwork just to create money-market or T-Bill returns? But investors love new black-boxes.
Maybe T-bills seem 'scary' or 'hard' because they're not basic equities, ETFs, or OEFs that the average retail investor knows about? I'm sure bond funds are so popular b/c they're easier than purchasing individual bonds (and doing the necessary research on them).
I agree 'black box' voodoo = opportunity for profits by those creating such vehicles. Worse, it removes the investor from their vehicle and forces them to place trust in the vehicle-driver to do the right thing in something they probably could do for themselves if they wanted to. (I go back to the notorious 'principal protection notes' being flogged to retailers from wirehouse firms before the GFC. )
Let us assume the economics work out the way the fund anticipates (e.g., without any counter party risks). Without discussing known risks, if you do not anticipate selling this fund and trigger cap gains, is this a good investment under various (or any) scenarios? E.g., can this be used as a rainy day fund?
The fund uses options strategies to create bill income. Counterparty risk is taken by the options corp. The occ. In a major, unprecedented event, margin might be insufficient. Government will step in because you can’t let the occ go belly up. You are back to us government risk. But will skip a heartbeat in exchange for potentially saving some tax.
Comments
It combines derivatives with in-kind trading features of the ETFs to avoid distributions. So, one buys it and then pays CGs only on sale. ER of 19.5 bps is OK. While remarkable, it looks lot of complicated work to achieve approximately the m-mkt returns.
If the links are behind the paywall, BOXX prospectus describes the strategy - it cannot be a total black box to get the SEC approval.
https://alphaarchitect.com/wp-content/uploads/compliance/etf/statutory_prospectus/BOXX_Prospectus.pdf
1. The etf vs mutual fund tax dodge must be glaring to the politicians in Washington looking for tax dollars. It’s gone on for too long. The implications if the tax dodge is equalized runs through every single fund and so the bucket has been kicked until it won’t.
2. Investing in t bills is taxed only federally. Incurring long term capital gains incurs federal long term tax and in high tax states also ordinary income (it does for NYC and California). So the “arbitrage” of the tax dodge needs some very particular characteristic at the individual level depending on one’s tax brackets. These are questions best reserved for @msf to educate us on.
My thought is boxx works for NOW for small sizes.
Maybe @msf or others can verify.
1. One man's tax dodge is another man's smart investing. In theory, ETFs don't have an advantage over mutual funds - the statute that makes cap gains disappear in a puff of smoke (via in-kind distributions) originally applied to corporations as well as mutual funds. Decades ago it was rewritten, maintaining the break for mutual funds while excluding corporations from this benefit.
This all happened before ETFs existed. ETFs benefit because they just happen to be a form of mutual fund. In practice, ETFs have the advantage because they redeem shares in-kind, while OEFs rarely do so.
That said, my personal feeling is that this dodge "provides an unfair tax subsidy for ETFs and encourages the transfer of capital from other kinds of investment vehicle to ETFs." This has got little to do with Washington scrounging up extra dollars - a fix could be revenue neutral. IMHO it's a matter of providing a level playing field.
Jeffrey M Colon, The Great ETF Tax Swindle: The Taxation of In-Kind Redemptions, Penn State Law Review (2017)
There are lots of loopholes begging for attention, such as carried interest. And one that seems to curry favor here - unrestricted Roth conversions - a way of getting around income restrictions intended to limit tax benefits that higher earners receive. As the saying goes, it all depends on whose ox is being gored.
2. NYC is unusual in that it has both a high tax rate (combined NYS + NYC) and that rates go up pretty fast with income. This combination makes it quite possible for one to owe more taxes if the income is treated as cap gains (state/local taxable) than if it is treated as Treasury interest (ordinary tax, but only at federal level).
For example, in 2023 a couple with taxable income of $90K would pay 22% on ordinary income and 15% on cap gains. That 7% savings by treating the Treasury interest as cap gains would be more than offset by an added NYS tax of 5.5% plus a NYC tax of 3.876%.
Now this assumes that the taxpayer can't deduct the NY taxes due to SALT limits on deductions. That may change in 2026. In this particular example, even with a SALT deduction (worth 22% x 9.376% or about 2.06%), one would still pay more in net state and local taxes (7.3%) than one would save in fed taxes (7%). But it is close and one can easily conceive of other brackets where deductibility of SALT would make a difference.
In California, look at a couple with taxable income of $110K. As with the $90K NY couple, they'd be paying 22% fed tax on ordinary income and 15% on cap gains - a 7% difference. At the state level, they'd be paying 0% on Treasury interest but 8% on cap gains. Same problem.
This transmutation of Treasury interest into cap gains works very well for high earners - where the cap gains rate (even at 20%) is well below the fed rates of 35% or 37%. Of course it also works well for the hoi polloi in states with low or no local income taxes.
If you hold BOXX for over a year there is a small benefit; you pay 15% plus 5% vs 22or 24% etc ( depending on income)
IF you sell before a year, you get hosed, as pay both ST federal tax and ST State tax.
This would only make sense if you plan to hold them for at least a year.
The % differences even so are small unless you are in a very high bracket
https://elmwealth.com/thinking-outside-the-boxx/?utm_campaign=Blog Sendouts&utm_medium=email&_hsmi=296057847&_hsenc=p2ANqtz--AeL-c4GwpBcZuv-rg6YtEuhfFQNn20odig53zZLKgRHTF2nuh1iDd68UhWH1OIQR61kPxuuINlP0Eo4mX5peeMzvbMA&utm_content=296057847&utm_source=hs_email
Thanks for the link to the article! It was very insightful to explaining BOXX.
"If the BOXX ETF grows so large and attracts so much attention that it precipitates a change in the rules governing ETF taxation, the result would be a tremendous and lamentable decrease in investor welfare. We truly hope our worries are misplaced."
https://www.morningstar.com/funds/boxx-etf-cashlike-returns-without-tax-bill
All this fancy footwork just to create money-market or T-Bill returns? But investors love new black-boxes.
https://www.taxnotes.com/featured-analysis/tax-trap-inside-boxx/2024/03/08/7j8x0
I agree 'black box' voodoo = opportunity for profits by those creating such vehicles. Worse, it removes the investor from their vehicle and forces them to place trust in the vehicle-driver to do the right thing in something they probably could do for themselves if they wanted to. (I go back to the notorious 'principal protection notes' being flogged to retailers from wirehouse firms before the GFC. )
Let us assume the economics work out the way the fund anticipates (e.g., without any counter party risks). Without discussing known risks, if you do not anticipate selling this fund and trigger cap gains, is this a good investment under various (or any) scenarios? E.g., can this be used as a rainy day fund?