Educational Illustration
How ETFs virtually eliminate tax drag on invested capital.
ETFs have a unique tax mechanism that allows rebalancing without triggering taxable gains. What if you could integrate that structure directly into client portfolios?
A $200M fund holds $100M in each of two stocks. The manager's job: keep them 50 / 50.
To rebalance you'd sell the winner. In a mutual fund that sale creates a gain the law forces onto every shareholder.
Even weights again. Because no shares were sold, there's no realized gain and no forced distribution.
An Authorized Participant (e.g. Goldman) buys $50M of Stock A on the open market and contributes it to the ETF for new ETF shares.
The AP immediately redeems those shares back to the fund — requesting payment in-kind, not cash.
The ETF hands over its most-appreciated, lowest-basis Stock B — in-kind. There is no sale.
The embedded gain is permanently extinguished.
The AP receives Stock B at today's fair market value as its cost basis — not the ETF's old low basis. The embedded gain isn't transferred to the AP. Under §852(b)(6), it is permanently extinguished.
ETF Application
Consolidating a client's entire equity allocation into a single ETF moves the rebalancing transactions — and the tax drag that comes with them — out of their taxable account and into a structure built to neutralize them.
For educational discussion only — not tax, legal, or investment advice. This illustration is simplified to convey structure and mechanics. ETFs can and occasionally do distribute capital gains; tax outcomes depend on individual facts. IRC §852(b)(6) governs in-kind redemptions. Optimal Tax Asset Management, Inc. is a Registered Investment Adviser with the U.S. Securities and Exchange Commission; registration does not imply a certain level of skill or training. Securities offered through LPL Financial, member FINRA / SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor and a separate entity from LPL Financial. Investing involves risk, including possible loss of principal. Consult qualified counsel before acting. © 2026 Optimal Tax Asset Management. All rights reserved.