You're referring to custom baskets. Which yes, can be done, but will still take months to fully convert. If you're buying this new issue you're not getting a pure market cap weighted fund out of the gate. You're getting a much more concentrated version that costs more than VTI. I see no reason to buy such a thing on the secondary market.Again, I'm very confident that you're misguided on this. I'm not going to pretend to know the exact technicalities that the market makers use, but I've diligenced 10+ S351 ETFs that all have zero inflows of capital after launch and have 50-75+% turnover of the ETF portfolio within weeks/months with zero capital gains realized. I believe the major mechanism is called a hardbeat trade with the AP, which uses a structured creation/redemption process to purge unwanted securities for the desired allocation. Just pull the portfolio of AAUS when it launched earlier this year vs. today. It's completely different and has no material inflows of fresh capital. This is the whole thesis behind S351 ETF contributions. If they couldn't rebalance tax-free fairly quickly, then they'd have to screen incoming contributions like private placement exchange funds in order to have a balanced portfolio.
Yes, they could rebalance immediately, but the in-kind rebalancing mechanism only works its magic if you have new creations. Because the ETF structure ordinarily avoids capital gains through in-kind redemptions, a 351 ETF can only purge the low-basis pre-seed holdings when authorized participants redeem shares and take those shares out in-kind, or when new AP creations bring in new, higher-basis securities that dilute the old ones.
If they rebalance without net new inflows (and their corresponding in-kind creations) the fund will create massive capital gains which would be counterproductive to the whole point of the ETF in the first place.
Statistics: Posted by FundQuant — Fri Nov 21, 2025 11:50 pm — Replies 20 — Views 2111