[iav]

Not to overcomplicate things, but anyone planning to save money for >12 months should be using the BOXX ETF (https://etfsite.alphaarchitect.com/boxx/) to convert the interest income into a long-term capital gain. Even if you end up cashing out before the 12 months, you are still going to pay the same taxes as with a savings account, so there is truly no downside.

[ca_tech]

For a detailed report on the mechanics behind the BOXX ETF, Bloomberg just published this article: https://archive.is/8kq0G It is not a perfect solution for everyone. You do need to take into account your income tax rate and your capital gains tax rate.

[infecto]

The universe has come full circle.

For those of us who cannot resolve archive link.

Article https://www.bloomberg.com/news/articles/2024-02-22/this-exch...

Matt Levine's https://www.bloomberg.com/opinion/articles/2024-02-22/put-th...

[hippich]

Can someone explain it a bit better? I am not quite sure why in addition to spx this fund buys options on Bookings? Also, where is the risk in this strategy, besides counter parties risk.

[nonethewiser]

This is hilarious. It's not as risk-free as an FDIC insured HYSA account though. I don't care what the ETF tracks - being an ETF that tracks something comes with some additional risk.

[padolsey]

Yes to that. And this may be my own risk-averseness, but I don't have complete confidence in all these derivative instruments anyway. I don't have time or sufficient interest to look into the construction of ETFs and how their holdings are managed, so I will opt for a mixture of stock-picking, index funds, bonds, ETFs, and just plain old savings accounts at banks I can see on the cold hard cement of the city. I try to be diversified in which financial instruments I choose. It seems most people have blind faith that X or Y instrument are constructed, managed and regulated in a reliable and trustworthy way. They entrust their money into weird mechanisms where they believe they own AAPL stock but actually it's just a derivative slice on precarious terms (fractional shares or other slimey broker-made nonsense).

[MetaWhirledPeas]

What's the rate of return that way? The 5% coming from the bank is pretty nice and is easily understood. I scrolled to the end of that BOXX page and even watched the video, and I still don't understand it.

[KMag]

The short answer is that if you could answer that question in advance to a high accuracy, you could make billions as bond trader. In theory, you get paid similarly to regularly going out into the bond market and buying US government bonds that expire in the next few months, but with a potential tax savings twist. (I am a random Internet dude, not a tax lawyer.)

The returns supposedly track the short end of the yield curve on US Treasuries. That would make sense, as theoretically, the net premium of a box spread is equal to the net present value of the payout (under the no arbitrage assumption). That net present value should be very close to the yield on a zero-risk asset over the same time period. They're using 1 to 3 month options, so in theory, they get yield close to short-term US Treasuries (the market prices a near-zero probability of the US defaulting on its bonds in the next few months).

I haven't looked into the tracking error between SPY box spreads and the short end of the US yield curve. https://en.wikipedia.org/wiki/Box_spread#cite_note-2 says the yield averages about 0.35% above holding equivalent maturity US Treasuries.

Though, it sounds like they're using box spreads composed of American options, so I wonder how they deal with early exercise risk. You only get bond-like performance from a box spread if you don't have early-exercise risk. The further out of the money they place their strikes in the box spread to avoid early exercise risk, the lower the liquidity they get, and higher trading costs.

The tax trick is that they also enter into a delta-neutral trade on a high-value single stock. (They don't use and index for this part because they want the difference between the winning and losing parts of this trade to be as large as possible, so they want volatility in the underlying asset.) At certain points, they realize the losses on the losing half of that trade (reducing tax liability), and perform a tax-free in-kind exchange of units (shares) in their ETF for the winning half of that trade. Of course, they don't know in advance which half will win and which will lose, but it doesn't matter. The brokerage buying their ETF in order to make the tax-free exchange bumps up the price of the ETF, very close to the value of the winning leg of the tax-saving trade.

Note the several caveats above (and probably some I missed) in comparing with US Treasuries yield.

This is not investment or tax advice.

[_ink_]

The Bloomberg article states 5.07% after fees.

[andrewla]

I only just learned about this in Matt Levine's newsletter [1], and assuming they don't get regulated out of existence, it seems almost too good to be true. The effective tax-discounted rate of return on a 5.6% interest-bearing account is really only 3.5% because it's ordinary income (paying taxes of .37 * 5.6). But as long-term gains it becomes 4.3% (paying taxes of .238 * 5.6). And while it is compounding you pay no taxes at all.

[1] https://www.bloomberg.com/opinion/articles/2024-02-22/put-th...

[teeray]

> there is truly no downside

What about FDIC?

[empathy_m]

I keep thinking about parking cash in box spreads on SPX directly -- pay net $98,000 in option premium now and earn $100,000 in a few months, effectively lending to the market at the rate implied by highly liquid option prices.

The section 1256 tax treatment is especially cool not so much because of the 60/40 taxation but because if you have several consecutive years of 60/40 gains you can edit your past year's income by incurring a current year loss and having a carryback loss.

[vamega]

I've borrowed money using SPX box spreads. You can get data on the recent trades and build a box spread at https://www.boxtrades.com/

There's a long thread on the Bogleheads forums about Box Spreads here: https://www.bogleheads.org/forum/viewtopic.php?t=344667

[4star3star]

For someone like myself who is only sophisticated enough to fund an IRA, CD, or savings account, how does one start out with BOXX ETF?

[bombcar]

Go to https://www.bogleheads.org and read until you start to feel the ability to answer questions.

[andrewla]

Open a brokerage account, and buy it just like a stock. If you have an IRA you likely already have an account at a brokerage.