Wall Street ETFs Leverage Tax Benefits to Replicate Treasury Bill Returns

Imagine getting the same return as a US Treasury bill but paying nearly half the tax rate. That’s the pitch Wall Street is making with a new breed of ETFs, and investors are listening. So is the US Treasury.

A wave of exchange-traded funds has emerged that replicate the yields of short-term government debt while structuring returns as capital gains rather than ordinary income. The difference matters: capital gains top out at a 20% federal rate, while ordinary income from Treasury interest can hit 37%. For wealthy investors, that gap is worth rearranging their entire portfolio around.

The poster child for this approach is the Alpha Architect 1-3 Month Box ETF, trading under the ticker BOXX. Rather than buying actual Treasury bills, the fund uses options strategies known as box spreads to synthetically generate T-bill-equivalent returns.

A box spread is essentially a combination of options positions that locks in a fixed payout at expiration. The return is virtually guaranteed, much like a Treasury bill, but because the gains come through options contracts, they qualify for capital-gains tax treatment rather than ordinary income. The fund also offers deferral options, meaning investors can potentially delay realizing those gains.

This structure has proven especially appealing to high-net-worth investors who sit in the highest tax brackets, precisely the group that benefits most from the rate differential.

At least 87 ETFs launched through a provision known as Section 351 exchanges are currently under review by the US Treasury Department. Collectively, these funds manage approximately $18 billion in assets.

Section 351 allows investors to transfer appreciated assets into a fund without triggering an immediate tax event. The Treasury started looking more closely at these conversions as early as February 2026, and the topic has been a recurring subject at industry events through late August 2026.

Bloomberg estimates that the broader ETF tax loophole, encompassing strategies like BOXX and Section 351 conversions, costs the US Treasury roughly $48 billion annually in deferred or avoided capital-gains taxes.

The Investment Company Institute, the trade group representing fund managers, has formally requested guidance from the Treasury on Section 351 ETF exchanges as of June 2026.

Treasury officials have been conducting internal discussions about reinforcing existing guidance and potentially exploring restrictions to prevent what they view as abuses of tax provisions.

If the Treasury does implement new guidelines, fund managers would face higher compliance costs. Some of these products might become less attractive or economically unviable if the tax treatment changes.