Vanguard Patented a Way to Avoid Taxes on Mutual Funds(bloomberg.com)
bloomberg.com
Vanguard Patented a Way to Avoid Taxes on Mutual Funds
https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/
https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/
For example, an AP will place a redemption order for an equity ETF. Typically, they will either receive cash value of the ETF or a basket of equities that are selected by the Front Office that are part of the underlying index represented by the ETF (the selection for a given standard basket is its own topic of portfolio management). However, in the case of the aforementioned custom orders, Vanguard and the AP will negotiate a special basket of equities to be given in return for the redeemed ETF. Sometimes this basket will just contain a large number of shares of simply one security. It's even possible that both parties make money off of this transaction due to the tax code. This transaction allows Vanguard to unload a large number of securities without paying taxes on them, and allows the AP to obtain these securities a negotiated, cheaper price.
Essentially, the transaction could like something like this:
->Vanguard has 1,000 shares of CompanyX they want to unload. This company can be found in Index Z.
->AP has 1 share of the Vanguard ETF that tracks Index Z. They want to redeem it
->AP gives their 1 share of the ETF to Vanguard
->Vanguard gives them n shares of CompanyX, at say a 5% discount so that: .95 * $CompanyXPrice * Shares = 1 share of Index Z value
->Vanguard is spared the capital gains tax on these shares. AP gets these shares at a discount. They both (on paper) make or save money.
This is legal in the current tax code. The above example is simplified, but it should illustrate the situation (hopefully) well enough.
A brief blurb about it here too: https://www.pennstatelawreview.org/print-issues/articles/the...
[1] https://www.etf.com/etf-education-center/21021-who-are-autho...