Fuse Blog

Converting SMAs into ETFs

  • While still very limited in scope, some firms have begun converting SMAs into ETFs primarily via tax-free 351 conversions. As of March 25, 2024, there were a total of eight conversions, seven of which are active with $3.6 billion in AUM.
  • An ETF’s tax advantages have been the primary conversion driver, especially for actively managed strategies. Through in-kind redemptions, ETFs can avoid paying capital gains tax within their portfolios. Also, investor fees are tax-deductible, and gains from ETF sales are taxed as long-term gains if held for a sufficient duration, regardless of any short-term gains in the underlying portfolio.
  • Going forward, we will see more SMA-to-ETF conversions, albeit at a slow pace. SMAs are not without their benefits over ETFs, most notably their enhanced customization capabilities.

SMA-to-ETF Conversions, 2021-March 25, 2024

Blog 3.26.24

Source: Morningstar, FUSE Research