New Wall Street Funds Devise a Smart Tax Evasion Method

Wall Street Devises a Smart Tax Evasion Method

New Wall Street Funds Devise a Smart Tax Evasion Method

Artworks derive their value from the ingenuity of their design and the plan laid out before their inception. But when the plan is legal tax evasion or "tax engineering," the work becomes even more valuable in the turbulent world of financial markets.

Wall Street's new tax evasion strategy isn't limited to tax havens like the Cayman Islands or reliance on complex financial derivatives. It's designed to transform a publicly traded fund (ETF) into a tax-minimizing vehicle that operates quietly and automatically.

While dividends have long been a hallmark of equity investing—a testament to corporate discipline and a reward for investors—Round Hill Investments plans to launch the S&P 500 No Dividend Target exchange-traded fund on July 10, which will bear the symbol "XDIV." The fund's ambition is simple yet strategic: to track the performance of the popular benchmark index while avoiding dividends. The fund will sell its shares just before the ex-dividend date, keeping the income away from ETF shareholders and, consequently, their tax bills.

As stock indexes have risen in recent years and tax bills have grown concurrently, asset managers are developing products that give investors more control over when—and whether—they owe taxes. These strategies rely on sophisticated mechanisms to minimize taxable transactions, transforming the fund structure into a programmable, tax-sensitive vehicle. These strategies are implemented through US-regulated exchange-traded funds (ETFs) that trade on public exchanges, offering investors the accessibility and financial flexibility previously reserved for private wealth clients.

"The vehicle is designed for tax-conscious individuals—for those who want to invest in the S&P 500 without the burden of dividends," said Round Hill CEO Dave Mazza. "There hasn't been a product on the market that meets the needs of investors for this purpose." While most ETFs already avoid capital gains using a mechanism known as "in-kind redemptions," the XDIV strategy targets a different category of tax exposure: ordinary income.

The fund, which will initially charge a 0.0849% fee, will invest in other S&P 500 ETFs, such as Vanguard's VOO fund, but will close its positions just before the ex-dividend dates. It will then switch from one ETF to another that doesn't pay dividends. This may be suitable for clients who don't consistently reinvest their dividends—which could negatively impact performance—or high-net-worth individuals seeking to limit their taxable income in brokerage accounts.

"There are certain investors who don't want taxable income—and there are institutional investors who just want the total return on their investment," Mazza said. "Then there are tax-conscious individual investors who are focused on long-term compounding, but don't want to take current income because that means their total income—even if modest compared to what they might earn from their compensation—would still be taxable."

Missing a dividend isn't an end in itself. When a company distributes cash dividends to shareholders, its stock price typically declines by the same amount, so selling just before that moment realizes the dividend yield without collecting it. In other words, the value of the transaction should be net, some argue. What's changing is how—and when—investors are taxed. The XDIV fund joins a growing wave of tax-advantaged offerings.

In mid-June, LionShares LLC filed for an ETF that invests in other ETFs that track the U.S. large-cap stock market, but at the same time seeks to "minimize" distributions, according to its filing. Earlier, F/m Investments, a Washington-based asset manager with a growing portfolio of ETFs, filed for an ETF.

A number of new bond products are being introduced that allow for swapping investments between different investments to avoid dividends, something veteran industry expert Dave Nadig described as "smart." "The ability of ETFs to avoid capital gains is no longer just a technical quirk—it's a fundamental selling point, and issuers are embracing this feature," said Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence.