Eric Balchunas highlights growth of conversion ETFs into trillion-dollar market

There’s a corner of the ETF universe that most retail investors have never heard of, but it’s already sitting on $16.6 billion in assets and, according to Bloomberg Intelligence senior ETF analyst Eric Balchunas, could be on its way to becoming a trillion-dollar market.

The product in question: 351 conversion ETFs, named after Section 351 of the US tax code. About 77 of these funds have launched so far, and they’re designed to solve a very specific, very expensive problem that wealthy investors know all too well.

How the 351 conversion works

The concept is deceptively simple. An investor holds a large, concentrated position in a single stock, one that’s appreciated significantly over the years. Selling it would trigger a massive capital gains tax bill. So instead, they contribute those shares into a newly formed ETF in exchange for ETF shares, a move that qualifies as a tax-deferred transfer under 26 U.S. Code Section 351.

The ETF then uses those contributed shares as seed capital, building out a diversified portfolio around them. To qualify under the tax code, the fund must meet specific diversification tests: no more than 25% of the portfolio can be in any single issuer, and no more than 50% can be concentrated in five or fewer issuers.

The result is that the investor goes from holding a risky concentrated position to owning a diversified ETF, all while deferring the capital gains tax they would have owed on a traditional sale. The tax bill doesn’t disappear forever. It gets passed along in the cost basis of the new ETF shares.

The numbers behind the boom

Balchunas discussed the trend on a recent episode of the Bloomberg Trillions podcast, where he and co-host Joel Weber explored how quickly the space has grown. The approximately 77 funds launched through mid-2026 have accumulated around $16.6 billion in seed assets.

Firms like Alpha Architect have been particularly active, completing more than 35 of these conversion transactions. That firm alone has amassed over $1 billion in assets under management across its 351 ETF products.

For context, the entire ETF industry in the US manages roughly $10 trillion. A $16.6 billion niche doesn’t move the needle on that scale. But Balchunas sees the trajectory heading somewhere much larger, speculating that the category could eventually reach trillions as more high-net-worth investors and family offices discover the strategy.

The regulatory question mark

Not everyone is convinced the party will last. On the podcast, Balchunas and Weber debated whether these structures represent a legitimate tax planning tool or something closer to a loophole that regulators might eventually close.

The Treasury Department and the IRS have the authority to issue guidance or propose rule changes that could alter how Section 351 applies to ETF conversions. If regulators decide the structure is being used primarily as a tax avoidance mechanism rather than for genuine business purposes, they could impose restrictions that would dramatically reduce the appeal of these products.

Section 351 has been part of the tax code for decades, and it was originally designed for corporate formations, not ETFs. Its application to fund structures has been validated by tax counsel at multiple firms, and no formal challenge has materialized yet.

What this means for wealth management

The rise of 351 conversion ETFs represents a broader shift in how the financial services industry thinks about tax efficiency. For years, the primary tools for managing concentrated stock positions were charitable remainder trusts, exchange funds, and collar strategies.

Compared to a traditional exchange fund, which typically locks up capital for seven years and requires coordination among multiple investors, the ETF structure is far more flexible, with daily pricing and easy rebalancing.