For many investors, success creates a new problem.

After years of strong market performance, concentrated stock positions in companies like Nvidia, Broadcom, Amazon, Meta, and other high-growth names have generated enormous wealth. But they have also created a dilemma: how do you diversify without generating a massive tax bill?

That question was at the center of a recent Financial Experts Network webinar featuring Philip Toews, Founder and CEO of Toews Asset Management, and Eben Burr, President of Toews Asset Management. The discussion explored one of the lesser-known tools available to advisors and investors: the Section 351 ETF Exchange.

While most advisors are familiar with tax-loss harvesting, charitable giving strategies, and direct indexing, relatively few have explored how a 351 ETF exchange can potentially help clients diversify highly appreciated stock positions while deferring capital gains taxes.

The Concentrated Stock Challenge

The past decade has produced extraordinary returns in certain areas of the market.

Many investors who purchased shares of large technology companies years ago now find themselves sitting on substantial unrealized gains. In some cases, a single stock may represent a significant portion of a client's net worth.

The challenge is straightforward:

• Clients want diversification.
• Advisors want risk reduction.
• Nobody wants to trigger unnecessary taxes.

For many investors, the tax consequences of selling appreciated stock become a major obstacle to prudent portfolio management.

As Philip Toews noted during the webinar, investors often feel "stuck" in positions they know they should diversify simply because the embedded tax liability is so significant.

What Is a 351 ETF Exchange?

A Section 351 exchange is a provision of the tax code that allows qualifying property to be contributed to a corporation in exchange for stock without immediately recognizing gain or loss under certain circumstances.

In the ETF world, this provision can be used to contribute appreciated stocks and ETFs into a newly launched ETF in exchange for ETF shares.

The key benefit?

The investor's gain is generally deferred rather than immediately recognized.

In simple terms, investors can potentially move from a concentrated stock position into a more diversified ETF structure without creating an immediate taxable event.

The presenters described it as the closest thing available to a "1031 exchange for stocks," although the mechanics and rules are very different.

Why Advisors Are Paying Attention

For advisors managing clients with large taxable portfolios, the strategy offers several potential advantages:

Tax Deferral

The most obvious benefit is the ability to defer capital gains taxes while repositioning a portfolio.

Diversification

Clients can reduce exposure to a single company or small group of holdings.

Liquidity

Unlike many exchange funds, ETF-based 351 exchanges provide the liquidity and transparency investors expect from traditional ETFs.

Portfolio Modernization

The strategy can help address situations where clients are trapped in outdated allocations or highly appreciated direct-indexing portfolios.

Not Everyone Qualifies

One of the most important points made during the webinar was that Section 351 exchanges are not a solution for every concentrated stock position.

The IRS diversification requirements create meaningful limitations.

A key requirement is often referred to as the 25/50 Rule:

• No single issuer can represent more than 25% of the contributed portfolio.
• The top five positions combined cannot exceed 50% of the contributed portfolio.

This means that an investor whose portfolio consists almost entirely of a single stock may not qualify without additional diversified assets.

For example, a client with $10 million of a single stock representing 95% of their portfolio would likely have difficulty meeting diversification requirements.

The strategy works best when clients have a combination of appreciated positions that can be structured appropriately within the IRS guidelines.

How Syndicated 351 Exchanges Work

One of the more fascinating aspects of the webinar was the discussion of syndicated exchanges.

Rather than relying on a single investor's portfolio, multiple advisors and multiple clients contribute holdings into a newly launched ETF.

This allows various concentrated positions to be combined in a way that creates a diversified portfolio.

In effect, one investor's large Broadcom position may be balanced by another investor's Nvidia position and another's Amazon holdings.

The result is a diversified ETF that may be difficult for any one investor to create independently.

Exchange Funds vs. 351 ETF Exchanges

The presenters spent considerable time explaining the differences between traditional exchange funds and ETF-based 351 exchanges.

Traditional exchange funds often involve:

• Long lockup periods
• Limited liquidity
• K-1 tax reporting
• Reduced transparency

ETF-based structures, by contrast, generally offer:

• Daily liquidity
• Public market pricing
• Standard ETF reporting
• Greater transparency

For many investors, these differences may be significant when evaluating diversification alternatives.

Why Market Conditions Matter

Another theme throughout the webinar was timing.

The presenters pointed to elevated market valuations and ongoing concentration among large-cap technology stocks as reasons advisors should be reviewing concentrated positions today.

Whether or not investors believe markets are in a bubble, concentration risk remains concentration risk.

The webinar emphasized that tax planning should not prevent prudent risk management.

The objective is not to predict market declines. Rather, it is to ensure clients are not taking more risk than intended simply because taxes have become a barrier to diversification.

The Role of Hedged Equity Strategies

While the webinar primarily focused on 351 exchanges, Philip Toews also discussed how hedged equity ETFs can potentially complement diversification efforts.

The goal of these strategies is to:

• Participate in market growth
• Reduce downside risk
• Improve investor behavior during market volatility
• Help clients stay invested during difficult markets

The presenters argued that risk management becomes particularly important when working with clients whose wealth has become concentrated in a handful of highly appreciated securities.

Final Thoughts

For advisors working with high-net-worth clients, concentrated stock positions continue to be one of the most common and challenging planning issues.

Section 351 ETF exchanges will not replace charitable planning, tax-loss harvesting, exchange funds, or other diversification tools. However, they represent another potential option for clients seeking tax-efficient portfolio repositioning.

As always, the key is understanding the client's objectives, tax situation, liquidity needs, and risk tolerance before recommending any strategy.

For the right investor, a 351 ETF exchange may provide a valuable pathway toward diversification without forcing an immediate tax realization event.

Five Common Questions About 351 ETF Exchanges

Q1: Does a 351 ETF exchange eliminate capital gains taxes?

No. The strategy generally defers taxes rather than eliminating them. The investor's cost basis typically carries over into the ETF shares received, and taxes may be due when those shares are eventually sold.

Q2: Can a client contribute a single concentrated stock position?

Usually not by itself. IRS diversification requirements generally limit how much of one issuer can be included. Additional diversified holdings are often necessary to satisfy the 25/50 Rule.

Q3: How is a 351 ETF exchange different from an exchange fund?

Exchange funds are typically private structures with lockup periods and limited liquidity. ETF-based 351 exchanges generally offer daily liquidity, transparency, and standard ETF reporting.

Q4: Can clients sell ETF shares after the exchange?

Yes. Once the ETF launches, shares generally trade like any other ETF. However, selling shares may trigger capital gains based on the investor's carried-over cost basis.

Q5: Who is the ideal candidate for a 351 ETF exchange?

Clients with highly appreciated taxable stock positions who want diversification but are reluctant to trigger large capital gains taxes. The strategy tends to be most effective when investors have sufficient assets to satisfy diversification requirements and can participate in a qualifying ETF launch.