Thinking Outside the BOXX

Victor Haghani and James White There’s been a lot of excitement and reporting about a new ETF: the Alpha Architect 1-3 Month Box ETF (ticker BOXX), designed to give investors the return of short-term US Treasury Bills with the tax character of long-term capital gains.

Long-term capital gains are taxed at lower rates than interest income – 20% versus 37% for the top US federal tax rates. With short-term interest rates at about 5%, this 17% difference in tax rates provides 0.85% more annual after-tax return, and you can add another 0.07% if you use BOXX to defer your tax bill for 5 years. That’s pretty good, and worth paying attention to if you can get it.

Two excellent Bloomberg articles were published on Feb 22nd that do a terrific job explaining how BOXX achieves its tax “magic.” The first is by Zachary Mider, “T-Bills Without Tax Bills? and hours later came “Put the Money in the BOXX” by Matt Levine (and a few days later also by Matt there’s “Maybe Don’t Put the Money in the BOXX?”).

Since BOXX went live on December 22, 2022, its annualized return has been 0.09% higher than that of State Street’s SPDR Bloomberg 1-3 Month T-Bill ETF (ticker BIL). BOXX has a stated expense ratio of 0.395%, but currently charges 0.195% and has about $1 billion of assets, while BIL sports an expense ratio of 0.136%, has $31 billion of assets and has been around for 17 years.

However, past returns are not necessarily indicative of future performance, and we think it’s reasonable to expect that BOXX’s prospective post-tax, risk-adjusted return relative to BIL (or direct ownership of Treasury Bills) does not justify owning BOXX. Before diving in, we should qualify what follows by noting that we are not tax experts, and we have not been in touch with the creators of BOXX to make sure we are not misunderstanding their product.2