ETF strategy gains traction as Wall Street firms bet on tax benefits

Imagine getting the same return as a US Treasury bill but paying nearly half the tax rate. That’s the pitch Wall Street is making with a new breed of ETFs, and investors are listening. So is the US Treasury. A wave of exchange-traded funds has emerged that replicate the yields of short-term government debt while structuring returns as capital gains rather than ordinary income. The difference matters: capital gains top out at a 20% federal rate, while ordinary income from Treasury interest can hit 37%. For wealthy investors, that gap is worth rearranging their entire portfolio around. How the box-spread trick works The poster child for this approach is the Alpha Architect 1-3 Month Box ETF, trading under the ticker BOXX. Rather than buying actual Treasury bills, the fund uses options strategies known as box spreads to synthetically generate T-bill-equivalent returns. A box spread is essentially a combination of options positions that locks in a fixed payout at expiration. The return is virtually guaranteed, much like a Treasury bill, but because the gains come through options contracts, they qualify for capital-gains tax treatment rather than ordinary income. The fund also offers de...