Custom Basket

Like it sounds, a custom basket refers to a select grouping of securities, customized for a purpose. In ETFs, custom baskets come into play during the creation/redemption process for the purpose of improving tax efficiency. When ETF issuers rebalance portfolios, some ETF holdings may have incurred capital gains, which would have to be realized at rebalance. A custom basket is an in-kind mix of only certain securities the ETF issuer wants to trade (redeem) to avoid having to pass on capital gains distributions down the road. Until recently, only some ETFs were allowed to use custom baskets, but the Securities and Exchange Commission changed that when, in September 2019, it approved Rule 6c-11, known as the "ETF Rule." Under the new rule, effective in 2020, all ETFs may use custom baskets, which is great news for ETF investors everywhere.