What Is a 351 Exchange ETF for Concentrated Stock?

Concentrated stock positions are the result of conviction, time, and success. Over time, however, what once drove wealth creation can quietly become the portfolio’s largest risk. A single stock begins to dominate outcomes, volatility increases, and the fear of triggering a large capital-gains tax bill keeps investors stuck.

A 351 Exchange ETF is designed to solve this exact dilemma with precision and tax efficiency.

Under Section 351 of the U.S. Internal Revenue Code, investors may transfer appreciated securities into a newly formed corporation in exchange for shares, without recognizing capital gains at the time of the exchange, provided specific ownership and structural requirements are met. 

When applied thoughtfully, this framework allows investors to contribute eligible securities into a newly created ETF and receive ETF shares tax-deferred, rather than selling the position outright. 

The benefit is immediate and structural.

• A 351 Exchange ETF enables meaningful diversification without an upfront tax event. Investors convert a concentrated holding into a diversified ETF exposure while generally preserving cost basis and holding period. 

• The ETF wrapper adds long-term efficiency. ETFs benefit from in-kind creation and redemption mechanics, which historically reduce capital-gains distributions compared with traditional funds. 

• Third, there is liquidity and simplicity. Unlike many private solutions, a 351 Exchange ETF trades daily, offers transparent pricing, and consolidates complex legacy positions into a single, clean exposure.

It is important to distinguish this approach from a private exchange fund. Private exchange funds, often partnership structures, also aim to address concentration risk, but typically require long lock-up periods, commonly seven years or more, before investors can exit into a diversified basket. While effective in certain cases, these vehicles introduce illiquidity, limited transparency, and reduced flexibility.

A 351 Exchange ETF, by contrast, is a public-market solution. It offers liquidity, transparency, and operational simplicity, but it is usually a one-time conversion event, requiring careful upfront planning to ensure the portfolio is suitable for the structure.