Rethinking Investment Exposure Using ETFs and SMAs
For decades, mutual funds served as the default investment vehicle for individual investors. They provided broad diversification, professional management, and relatively easy access to financial markets. For many investors, mutual funds still play an important role, particularly in retirement accounts and legacy portfolios built over many years.
But the investment landscape has evolved. High-net-worth investors today often have access to more flexible and efficient tools—particularly exchange-traded funds (ETFs) and separately managed accounts (SMAs)—that can potentially offer greater tax efficiency, customization, and control.
CresAlta’s ETFs and SMAs are building blocks that fit wealth management’s evolving landscape and support modern asset allocation with an emphasis on flexibility and tax efficiency.
Efficient Building Blocks for Modern Portfolios
The investment landscape is changing constantly, and we believe today’s portfolios may benefit from a multi-vehicle approach. ETFs can provide efficient core exposure and liquidity; SMAs can offer customization and tax aware implementation; and mutual funds may provide access to specialized strategies, including illiquid investments, which may introduce differentiated return potential.
The goal is not to choose one vehicle over another but to use each where it can add the most value within the overall allocation.
ETFs: Tax Efficiency Options
ETFs have become a powerful portfolio tool because they combine broad market exposure with operational efficiency. Like mutual funds, ETFs generally allow investors to access diversified portfolios across various asset classes, sectors, or investment themes.
One of the most significant benefits of an ETF is tax efficiency. Through an in-kind creation and redemption mechanism, ETFs can often minimize capital gains distributions to shareholders. That means investors generally have greater control over when taxable gains are realized, rather than inheriting tax consequences created by activity elsewhere in the fund.
ETFs can also offer transparency, liquidity, and typically lower operating costs than many traditional mutual funds.
Still, ETFs are designed to serve a broad shareholder base. While they can potentially provide tax efficiency depending on an individual’s circumstances and trading activity, ETFs generally do not offer individualized customization.
SMAs: Investments Can be Personalized
SMAs typically offer direct ownership of individual securities within a professionally managed portfolio. That ownership generally provides a greater degree of flexibility and customization than pooled investment vehicles.
From a tax perspective, SMAs enable individualized tax management. Investors may harvest losses to offset gains elsewhere in their portfolios, strategically defer realized gains, transition concentrated positions over time, and donate appreciated securities directly to charitable organizations as part of philanthropic planning. Because assets are owned directly, SMA investors typically do not inherit taxable gains generated prior to their investment – unlike many pooled investments (particularly mutual funds) – though tax outcomes depend on implementation, market conditions, and applicable tax rules.
SMAs also allow portfolios to reflect personal investment preferences or restrictions. Specific sectors, industries, or security types can be excluded based on investor preferences. Legacy holdings can be incorporated and managed rather than liquidated solely to conform to a fund mandate. Fixed income portfolios can be built around customized maturity schedules or income needs, while equity strategies can be designed to align with specific risk objectives, tax sensitivities, or diversification goals.
For families with more complex wealth planning needs, SMAs may also be integrated into estate planning, trust structures, gifting strategies, and multigenerational wealth transfer plans. While pooled investment vehicles can play a role in these contexts, SMAs generally offer greater flexibility and security-level control in how strategies are implemented – although they may involve higher minimums and additional management costs.
| Exchange Traded Funds (ETF) | Separately Managed Account (SMA) | Mutual Fund | |
| Ownership | Investor owns shares of an ETF, which holds a basket of securities | Individual securities owned directly by the investor in their account | Investor owns shares in a pooled fund |
| Customization | Customization is generally not available—all shareholders own shares of the same portfolio. | Highly customizable to investor’s goals, risk tolerance, and tax considerations | Investors generally cannot customize the underlying portfolio. |
| Tax Efficiency | Often, tax-efficient by design due to in-kind creation/redemption process, which can minimize capital gains distributions | Often requires active tax-aware management, such as harvesting losses | Gains/losses are shared across all investors, potentially leading to unwanted taxable events |
| Minimum Investment | Generally ETFs have no formal minimum beyond the cost of one share | Typically requires a relatively high minimum investment | May have lower investment minimums |
| Portfolio Liquidity | Typically high liquidity; trades on exchanges throughout the day at market prices, offering intraday liquidity | Investments within the SMA can generally be sold during regular trading hours, but settlement of trades and liquidation of a portfolio is not instantaneous | Daily liquidity with redemptions |
| Fees | Costs are typically reflected in the ETF’s expense ratio (plus any brokerage trading costs) | Generally, a management fee based on assets under management (AUM) and trading fees | Expense ratios apply, with possibility of additional fees such as sales charges or commissions |
Source: AMG National Trust
This chart is provided for informational and educational purposes only and is intended to illustrate general characteristics of various types of investment vehicles. The features described are generalizations and may not apply to all products or investment strategies. There can be significant differences among individual investment vehicles with respect to fees, liquidity, tax treatment, customization, investment objectives, and risks. Tax advantages, if any, depend on an investor’s individual circumstances and applicable tax laws. Investors should consult their financial, tax, and legal advisors before making any investment decisions.
Mutual Funds Still Have a Place—But Their Role Has Narrowed
We believe mutual funds remain useful in certain situations. They continue to be a practical choice for retirement plans, automatic investment programs, and for access to active managers that may only offer mutual fund share classes. Their relatively low minimum investment requirements and broad diversification also make them accessible to a wide range of investors.
However, mutual funds are designed for pooled investing, and that structure can create limitations for investors with more complex needs – particularly in taxable accounts. Because investors own shares of a fund rather than directly owning the underlying securities, they have little control over tax events generated inside the portfolio. Capital gains distributions can create taxable income—even for shareholders who recently invested or did not personally benefit from the gains that triggered the distribution. Portfolio construction is also standardized, leaving little room to tailor holdings around an investor’s unique goals, preferences, or tax circumstances.
“351” Option to Transition from SMA to ETF
The contribution of appreciated securities from an SMA into an ETF in exchange for ETF shares (known as a Section 351 exchange) can allow investors to defer capital gains taxes until the ETF shares are sold, provided applicable requirements are met.
Following a Section 351 exchange, investors may gain access to several beneficial features of the ETF structure, including intraday liquidity, simplified portfolio administration, and improved tax efficiency moving forward—all while potentially deferring a significant taxable event.
Participating in a Section 351 exchange may not always be appropriate or available for all investors. As such, the potential benefits of a Section 351 exchange should be evaluated in the context of an investor’s unique needs, tax situation, and overall financial plan.
Choosing the Right Vehicle Starts with Your Goals
Investors may benefit from understanding the differences among investment vehicles and evaluating how each may fit within their broader portfolio. In practice, the outcome is often a well-diversified portfolio.
For many investors, the focus is on balancing risk-adjusted return potential with tax-aware implementation. A multi-vehicle approach can play an important role in supporting these objectives.
CresAlta’s ETFs and SMAs are designed to support tax-aware portfolio construction. Let’s start a conversation about how CresAlta may fit within your overall investment strategy.
Tax efficiency is not guaranteed and varies depending on the investment vehicle, portfolio turnover, distributions, and investor circumstances.
A transaction intended to qualify as a tax-deferred exchange under Section 351 of the Internal Revenue Code is subject to specific requirements and limitations. Qualification depends on the facts and circumstances of the transaction. Investors should consult their own tax advisor regarding the tax consequences of any Section 351 exchange and whether such a transaction is appropriate for their individual situation.
An SMA does not have a prospectus, is not a registered product, and does not afford the oversight that a 1940 Act product does. CVGD and CVSM are 1940 Act funds and distributed by Paralel Distributors LLC (Paralel). SMAs and related investment advisory services are provided by CresAlta Investment Management, Inc., a federally registered investment adviser. Paralel is not affiliated with CresAlta Investment Management, Inc. and does not distribute SMAs.