The 351 Exchange: A Smart Way to Untangle a Messy Portfolio
Jack Vogel, PhD and Ryan Kirlin
Thu, September 17, 2026 at 1:11 AM GMT+3 6 min read
What is a 351 Exchange?
The name "351 Exchange" comes from Section 351 of the Internal Revenue Code ("IRC"). Section 351 permits a person to contribute appreciated property in exchange for shares of a newly formed corporation without recognizing a taxable event at the time of transfer, if certain rules are met.
In this application, the property being contributed is shares of stock or ETFs, in exchange for shares of a newly formed corporation, a new ETF.
To qualify, here are a few rules:
1) The contributor must be an eligible participant. In short, most can participate, but C corporations can cause issues, so they are generally excluded.
2) Each contributor must contribute a diversified portfolio. Diversification is defined by the IRS with two tests applied to each contributor's portfolio: Of the contributed portfolio, (1) the weight of the largest position must be no more than 25%, and (2) the sum of the weights of the top 5 positions must be no more than 50%.
How to Qualify for a 351 Exchange: Understanding the Diversification Requirements
For most contributors, calculating the diversification tests can take some thought. While the 25% and 50% rules can be easy to calculate for individual stocks, there is one very important note regarding the diversification tests – if a participant contributes shares of a prior ETF, that ETF is assessed on a look-through basis. In other words, a large-cap ETF is not "one position" but potentially hundreds of positions. Since many portfolios hold ETFs, the look-through rules can be difficult to calculate. Given that look-through analysis can be difficult, Alpha Architect has developed a proprietary tool that checks the submitted portfolio to return a preliminary "pass" or "fail" indication. While there may still be some deliberation about the final portfolio contributed, the tool can be a helpful starting point for judging whether a portfolio is likely to qualify. It is not a substitute for advice from the contributor's own tax advisor. To learn more, please contact us at info@alphaarchitect.com.
Having helped evaluate thousands of portfolios through our 351 software platform, we see four common use cases: (1) an exhausted direct indexing portfolio, (2) an otherwise diversified portfolio dominated by one or two concentrated positions, (3) a portfolio of 30-50 stocks acquired throughout the years, and (4) a complete mess of a portfolio – hundreds of stocks and tens of ETFs. A 351 Exchange can help to simplify those portfolios, as well as potentially improve diversification.
What about the new ETF?
At this point, we've focused on how an existing portfolio can potentially qualify for a 351 Exchange.
What about the other half of the transaction – the new ETF a contributor is exchanging their funds into?
The investment strategy will vary by fund sponsor. You can find funds with value or growth tilts, portfolios that focus on international stocks, and different weighting schemes. In each case, however, the receiving ETF must operate within the applicable diversification framework, and generally only accepts contributions that match the investment objective of the fund.
When is this available?
To contribute to a 351 Exchange, you are either "in" or "out" on day 0. This means that syndicated 351 Exchanges are one-time events tied to a specific ETF launch. After the exchange is completed, while investors can still buy shares of the ETF in the market, additional appreciated securities generally cannot be contributed via a 351 Exchange.
Suppose the sponsor sets a November 1 contribution deadline for a December 1 launch. At Alpha Architect, our participation window would generally close a few weeks prior to the projected launch date of December 1. After the deadline (November 1 in this example), no new portfolios will be accepted.
Prior to the contribution deadline, investors who wish to participate must identify the securities they wish to contribute, confirm that the portfolio satisfies the applicable diversification tests, and complete the required documentation. The exact timeline varies by sponsor and transaction.
How much work is involved?
This is a very common question that we get from advisors and the answer is simple: we believe the workload is minimal. It is also worth weighing against the ongoing work of the status quo: reconciling hundreds of tax lots each year, fielding client questions about a 100-page statement, and executing trades across dozens of tickers every time the portfolio needs attention.
After completing multiple 351 Exchanges, we continue to improve our contribution tool to help facilitate the process. Once advisors are familiar with the tool, the process can take under 20 minutes per contributor.
Of course, advisors will need to communicate with their clients and ensure that a 351 Exchange is appropriate for their situation. However, once the client agrees that a 351 Exchange is beneficial to their portfolio, our tool helps to easily facilitate the 351 Exchange.
Investors interested in learning more about 351 Exchanges in general or participating in an upcoming exchange specifically may contact us at info@alphaarchitect.com.
The bottom line
For investors with portfolios that no longer fit their needs, taxes – and the sheer operational weight of the portfolio – can make moving on easier said than done. Years of tax-loss harvesting, market appreciation, or a handful of successful investments can leave investors choosing between maintaining a portfolio they no longer want and realizing significant capital gains to change it. A 351 Exchange may offer another option: contribute the existing portfolio to a new ETF and, if the applicable requirements are met, receive shares of a simpler, diversified ETF with professional portfolio management. Note that a 351 Exchange defers rather than eliminates the embedded gain – the contributor's cost basis generally carries over to the new ETF shares – so investors should consult their own tax advisor before participating.
IMPORTANT INFORMATION
PRINCIPAL INVESTMENT RISKS
Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs' net asset value (NAV), and are not individually redeemable directly with the ETFs. Brokerage commissions and ETF expenses will reduce returns. ETFs are subject to specific risks, depending on the nature of the underlying strategy of the Funds, which should be considered carefully when making investment decisions. For a complete description of the Funds' principal investment risks, please refer to the prospectus.
351 Exchange Risks. Section 351 of the US Internal Revenue Code ("IRC") permits the transfer of ownership in a basket of securities with unrealized capital gains to a newly-formed ETF without recognizing those gains at the time of transfer, assuming certain conditions are met. IRC section 368(a)(2)(F) requires registered investment companies (RICs) to satisfy diversification requirements of at least 50% of assets in positions representing no more than 5% per issuer and 10% of an issuer's voting securities, and no more than 25% of assets in any one issuer (or controlled group or Qualified Publicly Traded Partnership (QPTP)). The rules surrounding a §351 exchange involving securities are complex. It is highly recommended to consult with a tax advisor or tax attorney to ensure compliance with IRS regulations and avoid unintended tax consequences. The information presented herein should not be construed or relied upon as tax, legal, or financial advice. Neither Alpha Architect nor its affiliates provide tax advice.
New Fund Risk. The Fund(s) are a recently organized investment company with no operating history. As a result, prospective investors have no track record or history on which to base their investment decision. There can be no assurance that the Fund will grow to or maintain an economically viable size.
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