BOXX ETF: Treasury Returns Without the Taxes?

Hello, YieldAlley readers! In this week’s newsletter:

• Rates Roundup for money market funds, brokered CDs, Treasury bills, and ultra short-term bond ETFs.

• Read of the Week: BOXX ETF: Treasury Returns Without the Taxes?

• Elsewhere: Bitcoin highs, Biden tax breaks, Costco misses results, Locking in high yields.

The U.S. economy added 275,000 jobs in February, which beat expectations. However, this was overshadowed by the revised totals for January and December. 167,000 fewer jobs were created than previously reported.

Many market analysts now expect interest rate cuts to start in June, with two or three more cuts later in the year. The S&P 500 closed lower on Friday, down from Thursday’s record closing high. 2-year Treasury yields ended up largely unchanged after fluctuating earlier in the day, even briefly hitting a low point since early February.

BOXX ETF: Treasury Returns Without the Taxes?

There has been a lot of chatter about the BOXX ETF lately. With over $1 billion in assets, Alpha Architect 1-3 Month Box ETF BOXX claims to offer something unique — Treasury risk-free returns without taxable income.

BOXX is the first ETF that has attempted to do this and does so with an options strategy called a box spread. A box spread strategy leverages option contracts to secure risk-free returns. This approach involves pairing two option contracts that move in opposite directions, ensuring a consistently positive outcome at expiration determined by the difference between the strike prices. To learn more about how BOXX works, we recommend reading this Bloomberg article.

Because ETFs can offset short-term capital losses against gains and employ in-kind redemptions, BOXX has operated without distributing any capital gains since its inception in 2022!

Typically, when we hold a money market fund or ultra short-term Treasury ETF, the yield is taxed as ordinary income. For high earners, that could mean a tax rate of up to 37%. On the other hand, the highest tax rate for long-term capital gains is 20%. BOXX investors who hold the ETF for longer than a year could save up to 17% of gains.

So, should you buy it?

BOXX has done well since its inception on December 22, 2022, achieving an annualized return that surpasses the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) managed by State Street by 0.09%. Despite BOXX's official expense ratio being 0.395%, it currently charges a fee of 0.195% and oversees approximately $1 billion in assets. However, Elm Wealth wisely notes that BIL has been around for 17 years with an expense ratio of 0.136% and $9 billion in assets.

In addition, we need to consider state taxes. While US T-Bills enjoy exemption from state income tax, the capital gains from BOXX do not. This makes BOXX less appealing compared to investing in T-Bills via an ETF like USFR, TFLO, or SGOV, and even more so when compared to direct ownership of T-Bills.

Finally, there is an argument that the tax efficiency loophole that BOXX exploits might be challenged by regulators.

For these reasons, we remain on the sidelines but will continue to monitor BOXX as a cash-replacement investment for YieldAlley readers.

• Bitcoin broke $70,000 earlier in the week, a record high.

• Biden proposes $10,000 tax breaks for first-time homebuyers.

• Costco reports a quarterly miss, with stock closing on its worst day since May 2022.

• Investors are rushing to lock in high yields before the Fed begins interest rate cuts.

We’d love to hear from you. If you have any feedback or thoughts, please feel free to directly respond to this email with your message. Our ChatGPT bot is also available for your questions, as is our Facebook group.

If you enjoyed this newsletter, please subscribe here. Investing and saving is more fun with friends and family. You can forward this newsletter to anyone who might find the advice in this email useful!