How to Trade In Old Stocks for a New ETF

It would be remiss to talk about the tail-end of "hot tax summer" in ETFs without discussing 351s as a way to seed a new ETF in a tax-conscientious manner. Ryan Kirlin, President of Alpha Architect, shared the work the firm is doing in the area as well as their ETF that takes on market chaos, at Future Proof 2025. 

Transcript

Opening: The Chaos Protection ETF

Nadig: Alright, you guys also obviously run your own ETFs. I have to mention one that's got the craziest ticker in the industry: CAOS. Tell me a little bit about CAOS, what it does, and why people are putting money in it?

Kirlin: Well, the funny thing about CAOS is it's supposed to protect against chaos.

“Hot Tax Summer” Takes on 351s

Nadig: Hey there, Dave Nadig, I'm here with Ryan Kirlin, President of Alpha Architect. Let's get into it. Hot tax summer: 351 tax transfers. I've had advisors asking me about this. How does it actually work if a wealthy customer wants to take advantage of this newfangled way of seeding an ETF?

Kirlin: Hey, it can be anybody. But yeah, you move stocks that you may have locked up – maybe you were doing direct indexing for a while, or you maybe have an old pile of stocks from 20 years ago laying around, you just don't know what to do with them. You can actually take them, or it could be ETFs as well. You can take those old ETFs, old stocks, move them into a new ETF. It's a one-time transaction, so you get one shot at it. And then, at the end, you then have a new ETF that you're that you're part of that acts just like any other ETF once the transaction occurs.

Nadig: And you've done a few of these already, right?

Kirlin: Yeah, we've done I think over 16 of them year-to-date. The new thing we started doing though is a syndicated 351, where you can take advantage of it. An advisor could just bring one client of theirs in order to do it, as opposed to, contrast that with some large RIA firms have done it themselves. Where they're just like, "Hey, for all – only our clients, – we're going to do a 351 transaction and launch our own new ETF." So, that's really popular too.

The Reason to Own CAOS

Kirlin: One of our clients told us, they said, “We love CAOS. It’s one of our favorite funds but when we tell clients we’re adding CAOS to your portfolio, they’re like, 'Oh, uh.' No, no, don’t worry, it’s actually going to help eliminate chaos.”

But CAOS: it owns put options, we’re doing some box spreads, and we're doing some put spreads. Which the put options, you're going to lose money on most of the time because most of the time the world's okay. But in the times where the world's not okay, those things potentially could really fire hard. And then the other two pieces of CAOS, the box spreads and the put spreads, are there just to keep happy returns the rest of the time.

Nadig: Got it. So, it's a little bit of buying insurance but without selling the whole farm to do it.

Kirlin: That's right. Hopefully it's insurance you're getting paid to own.

Nadig: Got it. Love it. Ryan, thanks so much for joining us.

Kirlin: Thanks so much, Dave.