BOXX ETF uses index options to exploit US federal income tax loophole

[BMK]

This is a fascinating product, only about a year old...

Check out the Bloomberg article:

https://tinyurl.com/240222BBMiderBOXX

This a gift link. A Bloomberg subscription is not required. The link expires in seven days.

TL;DR:

The ETF uses SPX box spreads to generate capital gain that is roughly equivalent to the risk-free interest rate, i.e., 1-3 month T-Bills.

Then uses box spreads in something else to generate losses. They unwind the losing leg of the box spread to generate a loss, but with the winning leg, they do an in-kind redemption that avoids capital gains tax under the special rules for ETFs.

The ETF makes no distributions, and does not pass any taxable income of any kind onto its shareholders. The benefit is in the share price increase, which is roughly equivalent to 1-3 month T-Bills, and appears to be almost guaranteed.

The result, for a retail investor, is that if you put money in this thing and hold it long term, i.e., more than one year, you'll get capital gain in the form of increase in the share price that is roughly equivalent to holding 1-3 month T-Bills. But unlike T-Bills, there is no maturity. You can hold it indefinitely, and when you sell, you benefit from the long-term capital gain tax rate instead of the ordinary income tax rates that would be applicable to interest on T-Bills.

And you get this with a level of risk that most believe is equivalent to that of T-Bills. The box spreads have no risk, and the OCC and other forces eliminate any counterparty risk.

 

[themickey]

So about 5% pa risk free, not bad.

But if you held QQQ the past 12 months, 50%pa.

 

[BMK]

But if you held QQQ the past 12 months, 50%pa.

Dude, that's apples to oranges LOL. QQQ has a much higher risk level

 

[themickey]

Dude, that's apples to oranges LOL. QQQ has a much higher risk level

Dude, 10 x risk?

 

[S2007S]

Year to date up less than 1%

The market is printing free money with stocks returning 1% nearly every other day. ...

 

[Quanto]

...
“We spent seven years figuring out how to do this,” said Wesley Gray, the ex-Marine and chief executive officer of Alpha Architect. “My job is just to deliver all the value I possibly can to my shareholders, within the law.”

The fund, known by its ticker BOXX, surpassed $1 billion in assets this month. It is one of a number of efforts to use the ETF loophole in creative new ways, said Jeffrey Colon, a tax professor at Fordham University’s School of Law in New York. He called BOXX “the poster child for tax arbitrage.”
...
Gray said the creation of BOXX was a “team effort” and not his alone. He particularly credits Larry Lempert, who works at a sub-adviser to the fund.
...
The stock that BOXX uses for this task is usually Booking Holdings Inc., the owner of reservation websites like Priceline, OpenTable and Booking.com. In addition to placing box spreads on the S&P 500, from time to time BOXX will also buy one on Booking shares. Booking’s unusually high price, which hasn’t dipped below $3,000 this year, makes it an attractive stock for these trades, Gray said.
...

I wonder what the motiviation of this Mr. Gray is to make his strategy public.
Is he hoping for the said ETF loophole be closed by the regulators?
He clearly asks for trouble, IMO.
But I'm afraid something big already has been planned for exactly that case occuring... Guess what...

As the article says, these tickers are involved: BOXX, SPX and "from time to time" also BKNG.
And using this options strategy: https://en.wikipedia.org/wiki/Box_spread

 

[newwurldmn]

So about 5% pa risk free, not bad.

View attachment 335195

But if you held QQQ the past 12 months, 50%pa.

don’t be obtuse.

 

[themickey]

don’t be obtuse.

The result, for a retail investor, is that if you put money in this thing and hold it long term, i.e., more than one year, you'll get capital gain in the form of increase in the share price that is roughly equivalent to holding 1-3 month T-Bills.

Basic Info. 3 Month Treasury Bill Rate is at 5.25%, compared to 5.24% the previous market day and 4.73% last year. This is higher than the long term average of 4.19%.

 

[newwurldmn]

Basic Info. 3 Month Treasury Bill Rate is at 5.25%, compared to 5.24% the previous market day and 4.73% last year. This is higher than the long term average of 4.19%.

There are so many aspects of this that are interesting, instead you compare it to the QQQ’s.

Why not compare it to farmland, B RILY stock, or NVDA?

 

[BMK]

Is he hoping for the said ETF loophole be closed by the regulators?
He clearly asks for trouble, IMO.

Regulators can't close the loophole. It's built into federal tax law. Only Congress can change the law.

From the article:

Innovations like BOXX might bring fresh attention from Congress, where Ron Wyden, the Oregon Democrat and chairman of the Senate Finance Committee, floated the idea of ending ETFs’ special tax treatment in 2021. Any legislation would face stiff resistance from the $8.4 trillion ETF industry and its millions of individual investors.