AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

[Rick Ferri]

I discuss BOXX with Wes Gray on my latest Bogleheads on Investing podcast:

Wes Gray is my "Bogleheads on Investing" guest where we discuss BOXX, ETFs, and other interesting items

Rick Ferri

[SteadyOne]

This is a new fund idea of using box spread trades to achieve this. Traders have been doing this on their own for decades.

With an innovation of using a single stock to generate loss/gains pairs that can allow removal (tax-free) of gains via the AP redemption mechanism. That is the major innovation here and one that needs to be tested for operational and regulatory/taxation resilience.

There is a risk that the fund could have adverse rulings against it regarding their use for the AP redemption model for a single stock, apparently for the only purpose of generating gains and losses that can be decoupled for tax arbitrage reasons.

This takes the model implemented by Vanguard's now expired patent and taking it to the extreme logical conclusion.

Activist regulators and/or congressional action could imperil that model. I am no tax law expert, but the current model these guys are implementing does appear to meet the legal requirements to achieve the goals they set for the fund though.

The rest is well tested, understood, and transparent.

This will last until next IRS ruling. This is an obviously tax avoidance scheme on an industrial scale. Once it gets too large, IRS will act.

[cowbman]

352 posts? It surely will be nice if there is a summary of the consensus.

The consensus appears to be that BOXX has overall returns similarly to buying box spreads, offering returns roughly equivalent to 1-3 month treasuries after accounting for fees, as box spread rates slightly exceed those of treasuries. Currently, BOXX employs various mechanisms that seem to prevent it from being taxed like options and to defer the realization of gains until the point of sale, thereby deferring taxes. However, BOXX capital gains are not exempt from state taxes as treasuries are, so for residents of high-tax states, the benefits may be diminished. It is uncertain whether BOXX should/will be taxed in this manner, and there is a possibility that the IRS might decide that: 1) gains should be subject to the options 60/40 treatment, and 2) gains should be taxed at least annually. Additionally, BOXX carries other risks, although these are largely similar to those associated with any other ETF, with a possible added risk from the options market or from BOXX's growing market cap as a percentage of all box trades.

Also the possibility of tax at ordinary income rates.

Yes, sorry, one of the most important risks of BOXX (or buying box spreads)

In a state with no income tax, this is not a risk.

[retiringwhen]

Also the possibility of tax at ordinary income rates.

Yes, sorry, one of the most important risks of BOXX (or buying box spreads)

In a state with no income tax, this is not a risk.

Actually, investors in no income tax states have exactly the same risk as everyone else.

They are both exposed to potentially two different tax regimes: deferred CG upon sale vs. ordinary income. This investment has no special treatment at the state level, unlike Treasuries or other USGO. The only difference is the marginal rates consider for each tax regime.

While the absolute risk is the same (9% increase in marginal tax rate, without deferral for investors in 24% Ordinary Tax and 15% LTCG brackets), It could be argued the relative risk is higher for no income tax residents since the magnitude of the marginal difference are bigger.

[donaldfair71]

This is a new fund idea of using box spread trades to achieve this. Traders have been doing this on their own for decades.

With an innovation of using a single stock to generate loss/gains pairs that can allow removal (tax-free) of gains via the AP redemption mechanism. That is the major innovation here and one that needs to be tested for operational and regulatory/taxation resilience.

There is a risk that the fund could have adverse rulings against it regarding their use for the AP redemption model for a single stock, apparently for the only purpose of generating gains and losses that can be decoupled for tax arbitrage reasons.

This takes the model implemented by Vanguard's now expired patent and taking it to the extreme logical conclusion.

Activist regulators and/or congressional action could imperil that model. I am no tax law expert, but the current model these guys are implementing does appear to meet the legal requirements to achieve the goals they set for the fund though.

The rest is well tested, understood, and transparent.

This will last until next IRS ruling. This is an obviously tax avoidance scheme on an industrial scale. Once it gets too large, IRS will act.

Couldn't the same be said of ETFs in general?

[retiringwhen]

This will last until next IRS ruling. This is an obviously tax avoidance scheme on an industrial scale. Once it gets too large, IRS will act.

Couldn't the same be said of ETFs in general?

And Traditional IRAs, State Income and Property Tax Exemptions, Roth IRA contributions and conversions, Mega Back Door Roth Conversions, Qualified Dividends, LTCG rates, Tax Loss carryovers, Estate Tax exemptions, UGMA/UTMA account exemptions, 401K contributions exemptions, etc. Every single one of those areas of tax code has experienced meaningful (as in actionable) changes in their treatment in the tax code or IRS guidelines in the 21st Century.

Almost every single item I mentioned above has been considered industrial scale tax avoidance by someone with an axe to grind.

The thing to remember about BOXX's strategy, it is using clear, direct, documented, and in common use strategies as documented in the law, but in a new and unique sequence/form. The question really comes down whether the law will be changed to close the scheme. The same could have been said about almost all back door Roth schemes (and legislation gets proposed almost annually to banish the rule.) I'm not stopping Roth conversions because someone doesn't like them.

[tonyclifton]

Almost every single item I mentioned above has been considered industrial scale tax avoidance by someone with an axe to grind.

One of my takeaways from the Boglehead's podcast with the inventor of BOXX...The inventor of BOXX is willing to take some significant actions to avoid paying taxes - such as moving his family to Puerto Rico to seek the tax advantages.

[cowbman]

Also the possibility of tax at ordinary income rates.

Yes, sorry, one of the most important risks of BOXX (or buying box spreads)

In a state with no income tax, this is not a risk.

Actually, investors in no income tax states have exactly the same risk as everyone else.

They are both exposed to potentially two different tax regimes: deferred CG upon sale vs. ordinary income. This investment has no special treatment at the state level, unlike Treasuries or other USGO. The only difference is the marginal rates consider for each tax regime.

While the absolute risk is the same (9% increase in marginal tax rate, without deferral for investors in 24% Ordinary Tax and 15% LTCG brackets), It could be argued the relative risk is higher for no income tax residents since the magnitude of the marginal difference are bigger.

That's true, but I meant risk of taxes are only applicable at a federal level, so the tax advantage of Treasuries does not apply. I'm looking at it from the view, if taxed at LTCG, win! If not, it's essentially the same as anything else.

[rockstar]

Has anyone bought and sold this ETF and paid taxes on it here? Does it qualify for LTCG taxes after holding for it a year? If so, this is a nice place to be after filling up I Bond space.

[unmesh]

You could also buy your own box spread, but you’d probably want to keep it until the options expire. Your gains would be 60/40 long/short capital gains.

Are there brokerages that allow you to do a box spread trade on a single ticket which would minimize (eliminate?) execution risk?

[nalor511]

You could also buy your own box spread, but you’d probably want to keep it until the options expire. Your gains would be 60/40 long/short capital gains.

Are there brokerages that allow you to do a box spread trade on a single ticket which would minimize (eliminate?) execution risk?

re: single ticket, most of them do. The risk is not in 'execution', it's that you make a mistake entering numbers. https://www.boxtrades.com/ helps generate your trade. instructions https://thefinancebuff.com/short-box-sp ... elity.html

[unmesh]

Earlier this year I decided boxes weren’t worth it because I live in CA, so holding plain t-bills has a better after-tax yield than buying a box.

However with this product’s ability to seemingly transform that income into long term capital gains I think I need to revisit the drawing board and see if the benefit to my federal income tax owed would outweigh the cost of paying higher state tax. What a headache

I'm in CA too and just beginning to investigate box spreads as an alternative to T-Bills.

Did you come to a conclusion about the relative after tax returns in California from BOXX (or long box spreads) vs those from T-Bills?

[unmesh]

You could also buy your own box spread, but you’d probably want to keep it until the options expire. Your gains would be 60/40 long/short capital gains.

Are there brokerages that allow you to do a box spread trade on a single ticket which would minimize (eliminate?) execution risk?

re: single ticket, most of them do. The risk is not in 'execution', it's that you make a mistake entering numbers. https://www.boxtrades.com/ helps generate your trade. instructions https://thefinancebuff.com/short-box-sp ... elity.html

The financebuff.com article helped with the mechanics on the Fidelity website. I want to do long box spreads and will call my Fidelity guy to confirm that they will do cross margining of the legs and not eat into my account margin.

Thanks

[Impatience]

I'm in CA too and just beginning to investigate box spreads as an alternative to T-Bills.

Did you come to a conclusion about the relative after tax returns from BOXX vs those from T-Bills?

The general consensus/assumption is that when you dispose of BOXX it's ordinary short or long term capital gains depending on holding period same as a vanilla ETF. Hopefully the IRS does not blow a hole in that assumption but they would have reasonable grounds to do so.

[nalor511]

You could also buy your own box spread, but you’d probably want to keep it until the options expire. Your gains would be 60/40 long/short capital gains.

Are there brokerages that allow you to do a box spread trade on a single ticket which would minimize (eliminate?) execution risk?

re: single ticket, most of them do. The risk is not in 'execution', it's that you make a mistake entering numbers. https://www.boxtrades.com/ helps generate your trade. instructions https://thefinancebuff.com/short-box-sp ... elity.html

The financebuff.com article helped with the mechanics on the Fidelity website. I want to do long box spreads and will call my Fidelity guy to confirm that they will do cross margining of the legs and not eat into my account margin.

Thanks

Box spread always eat your marginability (margin space, I don't remember what they call that), but do not incur any margin interest at fidelity, was my experience

[unmesh]

I called Fidelity and learned that they will not let me place a box spread order on a single ticket and I'm too timid to place separate orders for the underlying legs.

Regarding BOXX, why is the intraday price fluctuation so much at times? On 9/23/2023, it was 19 cents.

[nalor511]

I called Fidelity and learned that they will not let me place a box spread order on a single ticket and I'm too timid to place separate orders for the underlying legs.

Regarding BOXX, why is the intraday price fluctuation so much at times? On 9/23/2023, it was 19 cents.

I don't understand what you mean, they won't let you. You need options level (3?) enabled or you can't do it. This is true at any broker. The instructions are in the financebuff article Definitely don't enter the legs separately.

[adamhg]

I called Fidelity and learned that they will not let me place a box spread order on a single ticket and I'm too timid to place separate orders for the underlying legs.

Regarding BOXX, why is the intraday price fluctuation so much at times? On 9/23/2023, it was 19 cents.

I've done box spreads on Fidelity for years

[unmesh]

@adamhg and @nalor511

That is interesting. My account is not set up for options so I couldn't fake out an order. I decided to talk to my Relationship Manager who said something to the effect that their Risk department decided to turn it off because clients were making mistakes and losing a lot of money.

It couldn't hurt to enable options and try it out for myself.

And are you guys seeing cross margining across the four legs so that daily fluctuations do not affect your account margin?

[Tex]

BOXX is making a distribution. Record 8/13/24, Payable 8/14/24.

[MrJedi]

BOXX is making a distribution. Record 8/13/24, Payable 8/14/24.

Thanks for the heads up. Relatively small amount but still interesting to know it's not immune.

Record Date
:
08/13/2024
Payable Date
:
08/14/2024
Income
:
Short Term Capital Gain
:
0.1228
Long Term Capital Gain
:
0.1678
Total Capital Gain
:
0.2906
Total Distro
:
0.2906

[Impatience]

Interesting development. I was surprised to see the dividend accrual hit yesterday evening.

What’s funny is the size of the dividend is quite close to the sudden drop that boxx experienced last week before recovering.

So can I claim this as a qualified dividend??

[hotpancakes]

Do we have any idea why the dividend was a) suddenly announced and b) whether it will be recurring?

[urban]

Do we have any idea why the dividend was a) suddenly announced and b) whether it will be recurring?

It is also going to be in December 2024. Seems to be a recurring thing.
https://etfsite.alphaarchitect.com/boxe ... tributions

[hotpancakes]

Do we have any idea why the dividend was a) suddenly announced and b) whether it will be recurring?

It is also going to be in December 2024. Seems to be a recurring thing.
https://etfsite.alphaarchitect.com/boxe ... tributions

The link you provided shows the December "distribution" being in *2023*, and also $0.00. Any published info about 12/2024?

[urban]

Do we have any idea why the dividend was a) suddenly announced and b) whether it will be recurring?

It is also going to be in December 2024. Seems to be a recurring thing.
https://etfsite.alphaarchitect.com/boxe ... tributions

The link you provided shows the December "distribution" being in *2023*, and also $0.00. Any published info about 12/2024?

Sorry, my mistake. Mixed 2023 with 2024. As such I am not aware of any published info about the rest of 2024.

[market timer]

The distribution is close to the ratio 60/40 LT gain / ST gain, which is how futures and futures options are taxed. Maybe this is how the fund will distribute gains in the future.

[market timer]

So can I claim this as a qualified dividend??

It's not a dividend. It's a capital gain distribution. You'll owe LT cap gains on the LT portion and ST cap gains on the ST portion.

[whodidntante]

I'm rather have a 60/40 cap gain distribution than a dividend. But Wes gets -2 wizard points for not magically eliminating distributions. It's OK. He still has points left.

[Lyrrad]

I wonder what happened.

As of October 31, 2023, the fund seemed to have about $50 million in accumulated capital losses on $531M in assets.

Now it's distributing $10M in capital gains on $3.8 billion in assets.

I wonder if they were unable or unwilling to repeat the BKNG transaction from last year, which I noted in a previous post about a (paywalled) Bloomberg article.

[jarjarM]

BOXX is making a distribution. Record 8/13/24, Payable 8/14/24.

Just saw the distribution in my accounts. Good thing I have some carried over capital loss from 2022/2023 that can be use to offset the distribution. At least it's most of it is long term cap gain and taxed at lower federal rate for me, although this isn't as nice as the original thesis where one can dictate the timing of capital gain realization without the forced distribution.

[jarjarM]

I'm rather have a 60/40 cap gain distribution than a dividend. But Wes gets -2 wizard points for not magically eliminating distributions. It's OK. He still has points left.

Totally

[illumination]

[Thread merged into here --admin LadyGeek]

I noticed in my brokerage account, BOXX had distributed a dividend. Part of it was classified as a long term dividend, a smaller part a short term dividend.

Any idea or guidance about how this fund will be operating in the future? Are these just a fraction of the total return they feel they have to now distribute for tax reasons? Or is this the entire yield of their options strategy simply passing through to the investor?

[cowbman]

It's like too early to tell. Mine still says pending but I have two dividends of differing amounts for the same day.

[LadyGeek]

I merged illumination's thread into the ongoing discussion.

(Thanks to the member who reported the post and provided a link to this thread.)

[whodidntante]

[Thread merged into here --admin LadyGeek]

I noticed in my brokerage account, BOXX had distributed a dividend. Part of it was classified as a long term dividend, a smaller part a short term dividend.

Any idea or guidance about how this fund will be operating in the future? Are these just a fraction of the total return they feel they have to now distribute for tax reasons? Or is this the entire yield of their options strategy simply passing through to the investor?

The fund did not distribute a dividend. It distributed capital gains.

The fund has appreciated more than this distribution. Some speculated that the fund would distribute by year end last year. I speculated that the fund was built to avoid distributions of any kind. Everyone was wrong.

[illumination]

[Thread merged into here --admin LadyGeek]

I noticed in my brokerage account, BOXX had distributed a dividend. Part of it was classified as a long term dividend, a smaller part a short term dividend.

Any idea or guidance about how this fund will be operating in the future? Are these just a fraction of the total return they feel they have to now distribute for tax reasons? Or is this the entire yield of their options strategy simply passing through to the investor?

The fund did not distribute a dividend. It distributed capital gains.

The fund has appreciated more than this distribution. Some speculated that the fund would distribute by year end last year. I speculated that the fund was built to avoid distributions of any kind. Everyone was wrong.

I read some speculation elsewhere that this was perhaps a one off event and not the new normal?

[CletusCaddy]

[Thread merged into here --admin LadyGeek]

I noticed in my brokerage account, BOXX had distributed a dividend. Part of it was classified as a long term dividend, a smaller part a short term dividend.

Any idea or guidance about how this fund will be operating in the future? Are these just a fraction of the total return they feel they have to now distribute for tax reasons? Or is this the entire yield of their options strategy simply passing through to the investor?

Game over

[illumination]

[Thread merged into here --admin LadyGeek]

I noticed in my brokerage account, BOXX had distributed a dividend. Part of it was classified as a long term dividend, a smaller part a short term dividend.

Any idea or guidance about how this fund will be operating in the future? Are these just a fraction of the total return they feel they have to now distribute for tax reasons? Or is this the entire yield of their options strategy simply passing through to the investor?

Game over

I'm not sure it is, this still represents a significant tax advantage for many people.

What I want to know is this the new normal moving forward? Company should really address this.

[Lawyered_]

[Thread merged into here --admin LadyGeek]

I noticed in my brokerage account, BOXX had distributed a dividend. Part of it was classified as a long term dividend, a smaller part a short term dividend.

Any idea or guidance about how this fund will be operating in the future? Are these just a fraction of the total return they feel they have to now distribute for tax reasons? Or is this the entire yield of their options strategy simply passing through to the investor?

Game over

I'm not sure it is, this still represents a significant tax advantage for many people.

What I want to know is this the new normal moving forward? Company should really address this.

I think it is a new normal after they consulted with some different tax attorneys. 60% long term capital gains/40% short term capital gains is still much better than a money market fund or SGOV, where the interest is 100% short term capital gains. I think the dream of 100% long term capital gains that can be deferred until you sell has sailed.

[half_day]

I think it is a new normal after they consulted with some different tax attorneys. 60% long term capital gains/40% short term capital gains is still much better than a money market fund or SGOV, where the interest is 100% short term capital gains. I think the dream of 100% long term capital gains that can be deferred until you sell has sailed.

Do you have a source for this being the new normal? After reading a few of the essays/blogs on BOXX I think this is originally how they should have operated. If this is the case, then opening your own long box spreads or just buying outright treasuries become strong contenders.
The former has some execution, operational, and liquidity risk for sure. Buying treasuries is what I settled on since with the the state tax deduction, the 60/40 LT ST treatment makes it a wash for me.

[jarjarM]

I think it is a new normal after they consulted with some different tax attorneys. 60% long term capital gains/40% short term capital gains is still much better than a money market fund or SGOV, where the interest is 100% short term capital gains. I think the dream of 100% long term capital gains that can be deferred until you sell has sailed.

Do you have a source for this being the new normal? After reading a few of the essays/blogs on BOXX I think this is originally how they should have operated. If this is the case, then opening your own long box spreads or just buying outright treasuries become strong contenders.
The former has some execution, operational, and liquidity risk for sure. Buying treasuries is what I settled on since with the the state tax deduction, the 60/40 LT ST treatment makes it a wash for me.

I think the fact that they're making long/short capital gain distribution is a strong evidence that this is going to be the new normal, unfortunately.

[medelste]

I discuss BOXX with Wes Gray on my latest Bogleheads on Investing podcast:

Wes Gray is my "Bogleheads on Investing" guest where we discuss BOXX, ETFs, and other interesting items

Rick Ferri

Would you mind reaching out to Wes and asking him whether distributions like this week's should be anticipated (annually or otherwise) by shareholders, or is there reason to believe this is the exception, not the rule?

[Rick Ferri]

I discuss BOXX with Wes Gray on my latest Bogleheads on Investing podcast:

Wes Gray is my "Bogleheads on Investing" guest where we discuss BOXX, ETFs, and other interesting items

Rick Ferri

Would you mind reaching out to Wes and asking him whether distributions like this week's should be anticipated (annually or otherwise) by shareholders, or is there reason to believe this is the exception, not the rule?

He addresses this in the podcast. If you listen, you’ll hear the answer directly from the source.

[tj]

I discuss BOXX with Wes Gray on my latest Bogleheads on Investing podcast:

Wes Gray is my "Bogleheads on Investing" guest where we discuss BOXX, ETFs, and other interesting items

Rick Ferri

Would you mind reaching out to Wes and asking him whether distributions like this week's should be anticipated (annually or otherwise) by shareholders, or is there reason to believe this is the exception, not the rule?

He addresses this in the podcast. If you listen, you’ll hear the answer directly from the source.

In this comment, a boglehead listened to it and states he refuses to discuss it?

viewtopic.php?p=7898880#p7898880

[nisiprius]

...Would you mind reaching out to Wes and asking him whether distributions like this week's should be anticipated (annually or otherwise) by shareholders, or is there reason to believe this is the exception, not the rule?

He addresses this in the podcast. If you listen, you’ll hear the answer directly from the source.

I can't find a transcript. I assume it's not available yet. It would be kind if you would give us the approximate time where he answers it. Or if someone who has listened would summarize Gray's answer.

[retiringwhen]

I discuss BOXX with Wes Gray on my latest Bogleheads on Investing podcast:

Wes Gray is my "Bogleheads on Investing" guest where we discuss BOXX, ETFs, and other interesting items

Rick Ferri

Would you mind reaching out to Wes and asking him whether distributions like this week's should be anticipated (annually or otherwise) by shareholders, or is there reason to believe this is the exception, not the rule?

He addresses this in the podcast. If you listen, you’ll hear the answer directly from the source.

In this comment, a boglehead listened to it and states he refuses to discuss it?

viewtopic.php?p=7898880#p7898880

Wes refused to discuss TAXES.

Wes stated that the goal of the fund is to avoid DISTRIBUTIONS to the extent possible.

My guess is that the SEC / IRS (not sure just who controls here) are in active discussions with AlphaArchitects about what is acceptable and we have no idea what is normal as not even the fund provider knows at this point. The recent disclosures in their prospectus tell me that the dream must be deferred.

[retiringwhen]

I can't find a transcript. I assume it's not available yet. It would be kind if you would give us the approximate time where he answers it. Or if someone who has listened would summarize Gray's answer.

start around 35 minutes for a run up to the distributions discussion.

starting at around 36:40 Rick's question and Wes' anwer quote is something like "our objective ... is to not distribute anything to the extent we are able..."

[Walkure]

I think it is a new normal after they consulted with some different tax attorneys. 60% long term capital gains/40% short term capital gains is still much better than a money market fund or SGOV, where the interest is 100% short term capital gains. I think the dream of 100% long term capital gains that can be deferred until you sell has sailed.

Do you have a source for this being the new normal? After reading a few of the essays/blogs on BOXX I think this is originally how they should have operated. If this is the case, then opening your own long box spreads or just buying outright treasuries become strong contenders.
The former has some execution, operational, and liquidity risk for sure. Buying treasuries is what I settled on since with the the state tax deduction, the 60/40 LT ST treatment makes it a wash for me.

Pure speculation on my part, but I think BOXX is still far preferable to rolling your own. In a money market or SGOV, you pay tax on 100% of interest as STCG. On direct box spreads, 60/40 treatment. With BOXX you only pay 60/40 on the distribution, with the rest of the accumulated price per share as capital gain at the time you sell. BOXX started trading at $100 per share at the end of 2022. Start of this year it was at $105.11, reached $108.43 just before the dividend, and distributed a paltry $0.2906 per share. Also, the fact that the AUM went from ~$500M to ~$3B in six months may have meant there weren't enough redemptions to heartbeat out all the gains, such rapid exponential growth is probably an unrepeatable phenomenon that will ease as the fund matures. I would expect occasional distributions from BOXX going forward (with the added benefit of partly heading off IRS/SEC scrutiny) but at a far lower rate than the headline yield thanks to the heartbeat mechanism.

[ObliviousInvestor]

At 31:00 is when Wes Gray brings up IRC 1258 which is why he's reluctant to talk about taxes.

Presumably he is trying to avoid running afoul of 1258(c)(2)(C).
https://www.law.cornell.edu/uscode/text/26/1258