Innovative Tax Strategies in Bond Investing [Alex Morris] | #596
Episode
60 min
Read time
2 min
Topics
Investing, Fundraising & VC, Leadership
AI-Generated Summary
Key Takeaways
- ✓Ultra-Short Treasury Innovation: F/m's TBIL fund replicates on-run 90-day Treasury bills with six billion dollars in assets, passes through securities lending revenue generating four to ten basis points additional yield, and rolls positions efficiently without basis risk unlike Treasury futures.
- ✓Inflation Protection Without Duration Risk: The RBIL fund provides CPI participation with only six months duration by buying TIPS securities within thirteen months of maturity, capturing structural cheapness as large institutions dump near-maturity TIPS, avoiding the duration losses that hurt long TIPS holders during 2021-2022 rate increases.
- ✓Tax-Free Compounding Structure: New compounder series (CPAG for aggregate bonds, CPHY for high yield) eliminates all taxable distributions by rotating between similar ETFs before dividend dates, delivering total return as price appreciation only, allowing indefinite tax deferral for taxable account holders who typically reinvest distributions anyway.
- ✓Securities Lending Revenue Capture: Bond ETFs can generate four to ten basis points through securities lending programs using third-party agents like eSec, requiring over 100% collateralization, with all revenue passed to investors rather than fund managers, replicating what large institutions do with treasury holdings.
- ✓Mutual Fund Share Class Conversion: Coming dual share class structure will allow mutual fund holders to convert tax-free into ETF share classes of the same fund, eliminating embedded capital gains distributions while maintaining the same underlying portfolio, expected to launch in 2026 after regulatory approval completes.
What It Covers
Alex Morris, CEO of F/m Investments, explains innovative tax-efficient bond ETF structures including T-Bill replication funds and new "compounder" products that eliminate taxable distributions while maintaining full bond market exposure through strategic ETF rotation.
Key Questions Answered
- •Ultra-Short Treasury Innovation: F/m's TBIL fund replicates on-run 90-day Treasury bills with six billion dollars in assets, passes through securities lending revenue generating four to ten basis points additional yield, and rolls positions efficiently without basis risk unlike Treasury futures.
- •Inflation Protection Without Duration Risk: The RBIL fund provides CPI participation with only six months duration by buying TIPS securities within thirteen months of maturity, capturing structural cheapness as large institutions dump near-maturity TIPS, avoiding the duration losses that hurt long TIPS holders during 2021-2022 rate increases.
- •Tax-Free Compounding Structure: New compounder series (CPAG for aggregate bonds, CPHY for high yield) eliminates all taxable distributions by rotating between similar ETFs before dividend dates, delivering total return as price appreciation only, allowing indefinite tax deferral for taxable account holders who typically reinvest distributions anyway.
- •Securities Lending Revenue Capture: Bond ETFs can generate four to ten basis points through securities lending programs using third-party agents like eSec, requiring over 100% collateralization, with all revenue passed to investors rather than fund managers, replicating what large institutions do with treasury holdings.
- •Mutual Fund Share Class Conversion: Coming dual share class structure will allow mutual fund holders to convert tax-free into ETF share classes of the same fund, eliminating embedded capital gains distributions while maintaining the same underlying portfolio, expected to launch in 2026 after regulatory approval completes.
Notable Moment
Morris reveals F/m almost named their flagship treasury fund "RFR" (risk-free rate) instead of TBIL, but marketing convinced him otherwise after a quantitative colleague enthusiastically endorsed the terrible ticker, prompting them to invoke the George Costanza opposite rule for final naming decisions.
Episode Transcript
Welcome to the Meb Faber show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here. Matt Faber is the cofounder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria's funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com. Today's show is sponsored by Cambria. Do you hold legacy investment positions with significant gains? What if you could transition into an transition into an ETF without facing a large tax bill? You can with the three fifty one ETF exchange. Here's how it works. Investors contribute stocks or other securities to a newly formed ETF in exchange for ETF shares. As long as the special rules and diversification requirements are met, the investor is essentially able to cede the launch of the ETF without an immediate taxable event. Because ETFs typically don't distribute any capital gains, investors don't face taxes until they sell their ETF shares, allowing for better control over the timing of the tax event. Are you ready to explore a three fifty one ETF exchange? Visit cambriafunds.com forward /351 to take the next step in innovative, tax savvy investing with Cambria today. Cambria Investment Management l p, Cambria is a registered investment adviser. Information set forth herein is for informational purposes only and does not constitute financial investment, tax, or legal advice. Past performance does not guarantee future results. All investments are subject to risks, including the risk of loss of principle. Welcome back, everybody. Got an awesome show today. Today, we're joined by Alex Morris, CEO, CIO of FM Investments, which is 19,000,000,000, darn near 20,000,000,000, darn near 50, a $100,000,000,000 boutique investment firm. I don't know if you can call it boutique anymore when you're 20,000,000,000. Alex and company entered the ETF teardown just a few years ago, and it's kinda burst on the scene, made a name for themselves. Alex is keyed into everything going on with bonds and fixed income. We'll talk about that a bit today. Alex, welcome to the show. Ma'am, thanks for having me. For that intro, I'm I'm worried it's all downhill from here now. Could be. Last time, we were going downhill on a bus in Utah drinking some wine or whiskey together, which was a lot of fun. We we weren't driving for anyone listening, just so we're clear. Good point. By the time this publishes, I will have seen you in person in Washington, DC, which is where you're located, and then probably seeing you in person again. Coming up, listeners, come see us at Future Proof. As always, we will be hosting a free surf lesson Monday morning. You can email us for …
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- F/m InvestmentsBy guest
“Alex Morris, CEO of F/m Investments, explains innovative tax-efficient bond ETF structures”
“Securities lending programs using third-party agents like eSec, requiring over 100% collateralization”
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“SPONSORS: The Idea Farm”
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