Four years after handling the first conversion of a hedge fund to an ETF, Wes Gray is gearing up to lead a surge of tax-busting deals aimed at investors big and small.
He’s part of a burgeoning industry ginning up creative ways to use tax laws and help investors dodge taxable investment gains — a business that is set to gather momentum after stocks soared the past couple years. His firm, ETF Architect, has already helped transform more than 50 funds into the tax-efficient ETF wrapper since 2019.
Gray also made waves on Wall Street after introducing a first-of-its-kind Treasury-bill ETF product that uses options to slash holders’ federal tax bills. The fund has reeled in almost $5 billion in assets since its 2022 launch. Now the 44-year-old former Marine says to get ready for more hedge funds and family offices submitting to the ETF frenzy this year through tax-skirting conversions.
He says he did four such deals last year that turned investment portfolios into ETFs without triggering a tax hit, a transaction known as a 351 conversion. By the end of 2025, he estimates his firm will handle at least 15 more, encompassing roughly $5 billion in projected assets — about five times last year’s tally. A third of his entire suite will consist of such transactions by the end of 2025, he says.
“Every single hire, everything we do, our focus as a firm is on how to facilitate 351s cheaper, faster, more transparent,” Gray said. “If we had enough people we could do 100 conversions this year.”
Market Beginnings
ETF Architect oversaw the inaugural deal of this kind, for hedge fund Upholdings, which converted a tech-heavy portfolio into an exchange-traded fund at the end of 2020. He also arranged what was at the time the largest such transaction, turning an $800 million portfolio for Carlson Capital Management into an ETF in 2024.
That deal showed money managers of all sizes the merit of transforming investment strategies into an ETF that’s accessible to investors broadly and also tax-friendly, and “now it’s become more commonplace,” Gray said.
Carlson Capital declined to comment. The firm’s conversion took more than a year to complete, according to Gray, because of the complicated back-end intricacies involved. But the fund — the CCM Global Equity ETF or CCMG — started trading in early 2024. Since then, such inquiries have been more frequent, Gray says.
Havertown, Pennsylvania-based ETF Architect is what’s known as a white-label platform. It helps others launch products into the $11 trillion ETF market. Gray, who has a PhD in finance from the University of Chicago, started Alpha Architect — an asset manager — in 2010 and its sister firm ETF Architect a few years later. He employs more than 30 people between the two.
The key to the tax-free ETF conversions is that the tax code allows investors to do so-called in-kind exchanges, meaning they can take a diversified portfolio of securities and exchange them into another wrapper — in this case ETFs — tax-free, according to Gray.
Retail, Too
ETF Architect is coming up with ways for retail investors to take part as well: In December it got the Cambria Tax Aware ETF (TAX) off the ground. The fund allows individual investors to exchange their appreciated stocks for shares of the ETF without a tax hit.
Other firms are also getting involved in this niche. Missouri-based Hill Investment Group, for example, plans to launch an ETF into this segment next month that will start trading with an estimated $500 million of assets.
The tax-dodging ETF maneuvers may yet fuel political blow-back down the road at a time of swelling federal deficits. But for now, there’s been a boom among firms looking to offer such strategies to clients. Transforming a portfolio into an ETF allows the issuer to offer a wider pool of clients an often cheaper and easier-to-trade alternative, but it also brings retail investors the sort of tax-saving tricks that were once reserved for the wealthy.
Thanks to how they’re structured, ETFs rarely incur capital-gains taxes, though investors pay when they ultimately sell appreciated shares. ETFs have become a standout way for companies to transform their actively managed mutual funds, hedge funds and separately managed accounts, or SMAs.
That tax-efficiency was a key driver for Andy Pratt, director of investment strategy at Burney Investment Management, who was seeing clients get hit with capital-gains tax bills in the firm’s actively managed SMAs.
“Once we learned about this opportunity, it became a no-brainer for clients,” he said. “Not only can we have clients take advantage of the tax efficiency of an ETF, but now we can get them into the ETF tax-efficiently too.”
He tapped ETF Architect for a conversion, launching the Burney US Factor Rotation ETF (BRNY) in 2022.
The tax-free conversion doubles the cost of launching an ETF, he said, “but it’s such a good deal for the client that we felt like we had to do it.”
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Vildana Hajric
