
Vanguard Patented a Way to Avoid Taxes on Mutual Funds - petethomas
https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/
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ThirdFoundation
They also __legally__ unload a large amount of tax burden by working with
APs[1] on special custom ETF redemption orders.

For example, an AP will place a redemption order for an equity ETF. Typically,
they will either receive cash value of the ETF or a basket of equities that
are selected by the Front Office that are part of the underlying index
represented by the ETF (the selection for a given _standard_ basket is its own
topic of portfolio management). However, in the case of the aforementioned
custom orders, Vanguard and the AP will negotiate a special basket of equities
to be given in return for the redeemed ETF. Sometimes this basket will just
contain a large number of shares of simply one security. It's even possible
that _both_ parties make money off of this transaction due to the tax code.
This transaction allows Vanguard to unload a large number of securities
without paying taxes on them, and allows the AP to obtain these securities a
negotiated, cheaper price.

Essentially, the transaction could like something like this:

->Vanguard has 1,000 shares of CompanyX they want to unload. This company can be found in Index Z.

->AP has 1 share of the Vanguard ETF that tracks Index Z. They want to redeem it

->AP gives their 1 share of the ETF to Vanguard

->Vanguard gives them n shares of CompanyX, at say a 5% discount so that: .95 * $CompanyXPrice * Shares = 1 share of Index Z value

->Vanguard is spared the capital gains tax on these shares. AP gets these shares at a discount. They both (on paper) make or save money.

This is legal in the current tax code. The above example is simplified, but it
should illustrate the situation (hopefully) well enough.

A brief blurb about it here too: [https://www.pennstatelawreview.org/print-
issues/articles/the...](https://www.pennstatelawreview.org/print-
issues/articles/the-great-etf-tax-swindle-the-taxation-of-in-kind-
redemptions/)

[1] [https://www.etf.com/etf-education-center/21021-who-are-
autho...](https://www.etf.com/etf-education-center/21021-who-are-authorized-
participants.html)

