Eric Balchunas highlights growth of conversion ETFs into trillion-dollar market

There’s a corner of the ETF universe that most retail investors have never heard of, but it’s already sitting on $16.6 billion in assets and, according to Bloomberg Intelligence senior ETF analyst Eric Balchunas, could be on its way to becoming a trillion-dollar market. The product in question: 351 conversion ETFs, named after Section 351 of the US tax code. About 77 of these funds have launched so far, and they’re designed to solve a very specific, very expensive problem that wealthy investors know all too well. How the 351 conversion works The concept is deceptively simple. An investor holds a large, concentrated position in a single stock, one that’s appreciated significantly over the years. Selling it would trigger a massive capital gains tax bill. So instead, they contribute those shares into a newly formed ETF in exchange for ETF shares, a move that qualifies as a tax-deferred transfer under 26 U.S. Code Section 351. The ETF then uses those contributed shares as seed capital, building out a diversified portfolio around them. To qualify under the tax code, the fund must meet specific diversification tests: no more than 25% of the portfolio can be in any single issuer, and no m...