ETF Prime · Oct 6, 2026 · 1h · 42m saved
With Cinthia Murphy, Director of Research at VettaFi · Jeff Klingelhofer, Managing Director and Portfolio Manager at Aristotle Pacific
US ETFs had taken in close to $1.6 trillion of new money by early October, already past last year's record of nearly $1.5 trillion. At the current daily pace, Cinthia Murphy of VettaFi worked out, the year ends at $2.05 trillion.
In the same weeks, the Treasury Department put out guidance warning that one popular route into ETFs, the tax-deferred 351 exchange, is being abused.
"This is a warning. It's not any kind of regulatory enforcement right now, but it's definitely a red flag for this path to ETFs that we've seen really get popular in recent years."
Cinthia Murphy, Director of Research at VettaFi, on ETF Prime, follows the industry's launches, filings and flows for VettaFi and its ETF Database site. The second guest, Jeff Klingelhofer, Managing Director and Portfolio Manager at Aristotle Pacific, has worked in fixed income for more than two decades, including at PIMCO and as co-head of investments at Thornburg. His $31 billion firm launched its first three ETFs at the end of July.
The full episode is covered here so you can skip it. 1 hour of audio, 18 minutes of reading.
Here are the 15 insights that matter.
Key Takeaways
ETFs seeded through 351 exchanges hold about $22B, and the Treasury now calls some of those deals abusive
Murphy cited Bloomberg data putting the deferred capital gains tax at about $6.5B
Murphy called sports-futures ETFs "a solution looking for a problem"
A new Texas exchange means more competition for ETF listings, which both said should lower costs for investors
Corgi has launched over 200 ETFs this year and may pass Invesco on fund count, but assets are the open question
Inflows at about $5.6B a day point to $2.05T for 2026, and the fourth quarter is usually the strongest
Klingelhofer said the bond index excludes much of the market, including data center debt issued off company balance sheets
Bonds yield 7% in multi-sector portfolios, and he does not expect rates to go much higher
High short-term rates could pull long-term yields down by convincing investors inflation will return to 2%
The weakest high-yield borrowers are under real stress, an early sign of a slowing economy
1. The IRS Targets 351 Swaps
The host opened with the Treasury Department's recent guidance on 351 exchanges, which he loosely called guidance and said neither he nor Murphy are tax experts. He put the market at over 100 ETFs seeded with some $20 to $25 billion through such exchanges.
He explained how they work. An investor contributes individual stocks or other securities to a new ETF and receives ETF shares back. Done correctly, that is not a taxable event, so an investor holding a concentrated portfolio of stocks with large gains can diversify without paying capital gains tax first. The IRS is now cracking down on exchanges it sees as abusive.
Murphy said the guidance is a warning, not enforcement, and that the real target is abuse
"I saw a data point from Bloomberg that we've had already about $22 billion of ETFs that have come through 351 exchanges which have basically meant about $6.5 billion dollar in unrealized cap gains taxes there." — Cinthia Murphy
Section 351 of the tax code lets an investor transfer property to a corporation in exchange for shares without realizing a gain. She said wealthy individuals and employees holding a lot of their own company's stock use it, and the ETF's creation and redemption process can then work on that cost basis tax-efficiently. The IRS and the Treasury, she said, now see some of it as a tax dodge rather than a deferral.
"The concern isn't about folks using 351 exchanges as design. Is folks abusing 351 exchanges, doing things like unloading your stock and then quickly redeeming on the other side or you unload on one type of ETF and that ETF overnight becomes a completely different fund." — Cinthia Murphy
"So, this is what happens when I guess we get too clever." — Cinthia Murphy
The host stressed that the strategy defers tax rather than avoiding it
"First of all, I do think it's important to note that this isn't a tax avoidance strategy, per se. This is a tax deferral." — The host
A US stock portfolio contributed to an ETF that quickly redeems it away and turns into an international fund is the kind of case the IRS will look at, he said. The guidance leaves a lot of gray area, which will make it hard for issuers to find the boundaries.
"I think and you said this, I think we are going to see a slowdown in 351 exchanges at least here in the short term." — The host
He took issue with the timing. Wealthy investors have used strategies like this for a long time, he said, and scrutiny arrived only once an ETF made it open to everyone, though he allowed that most current users probably lean wealthy. Murphy said the attention shows how much demand there is for ETFs. The host added that the government is looking for revenue wherever it can find it.
