Are the Days Numbered for This Tax-Saving ETF Strategy?

Many people like stocks and exchange-traded funds that pay big dividends because they’re seen as a form of passive income. You receive payments at regular and predictable intervals without really having to do anything.

But not everyone likes dividends because you have to pay taxes on them, and taxes are suboptimal for anyone trying to grow their money in a taxable account. It’s much better if you can grow your money without paying taxes. ETFs are very good at deferring taxes owed on capital gains, but they’re more restricted when avoiding or deferring taxes owed on dividends or interest.

Record-Date ETFs

There are a couple of ways you could build an ETF that won’t pay dividends and thus avoid any taxes owed on them. The first way is trivial. You could restrict the ETF’s holdings to stocks that don’t pay dividends. The problem is that many stocks pay dividends, especially the largest stocks in the market. You incur a lot of active risk by excluding those stocks, and there’s no reason to believe that avoiding dividend-paying stocks would lead to a better total return before or after taxes. You owe less tax, but you could realistically give up some total return.

The second way is more clever because it retains exposure to all stocks while still eliminating taxable dividend payments:

1. Buy an ETF that tracks the same index as other ETFs, such as the S&P 500 or Total US Market Index.
2. Sell it just before the record date when the ETF logs who it will pay dividends to. This is key, as you avoid receiving dividends that you’ll eventually owe taxes on.
3. Use the proceeds to immediately buy one of the other ETFs tracking the same index that has a different record date.
4. Repeat steps 2-3 whenever the ETF you’re holding is about to hit its record date.

That process more or less reproduces the total return of those similar ETFs without receiving a taxable dividend distribution. You wouldn’t want to do this in a taxable account because selling an ETF will likely trigger capital gains that you must pay taxes on, and that defeats the purpose.

However, you could do this inside another ETF and use its tax-free in-kind trades to facilitate selling the acquired ETF without incurring taxable capital gains.

It’s very clever.

Maybe too clever. A few weeks ago, the IRS published Notice 2026-62, which requested comments on a range of investments that were aimed at deferring, if not avoiding, taxes. Record-date strategies, those that I just described, were among those listed in the notice.

There are a few of these ETFs out there. Roundhill launched S&P 500 Accumulating ETF XDIV in July 2025. Then, F/m created two about a month later: Compoundr U.S. Aggregate Bond ETF CPAG and Compoundr High Yield Bond ETF CPHY.

The popularity of these ETFs has been muted and mixed. Roundhill S&P 500 Accumulating ETF has roughly $100 million invested in it, and F/m Compoundr U.S. Aggregate Bond ETF has about $151 million. But F/m Compoundr High Yield Bond ETF is much smaller, with about $3 million.

Another one, Lionshares U.S. Equity Total Return ETF TOT, plans to liquidate this week. It has only been trading for about a year and never grew very big, with a little more than $10 million invested in it as of Friday, Oct. 23.

The comment period for the IRS notice is still open through the end of October. We’ll have to wait and see what actions, if any, come out of it.

Inverse and Leveraged ETFs

Leveraged and inverse ETFs have been a hot topic this year, mostly because of the enormous number that have launched or are soon to be launched. Seventy-six were created in 2024, but the number exploded in 2025 when another 295 started trading. An additional 378 hit exchanges in 2026 (through Oct. 23), and there are filings for hundreds more sitting with the Securities and Exchange Commission.

The money invested in them has grown to a little more than $186 billion at the end of September 2026 from about $148 billion on Dec. 31, 2025. You might expect them to have reasonably large inflows given those numbers, but reality runs counter to that. Collectively, leveraged and inverse ETFs lost about $690 million to outflows over the first nine months of 2026.

Money left, yet they grew by almost $40 billion—you might conclude that these ETFs have performed rather well this year. More specifically, the largest of them produced some big rates of return, but they also had some of the largest outflows. The table below shows net flows and total return of the three largest leveraged ETFs. It isn’t a full accounting, but it’s directionally consistent with how total returns and flows stacked up.

Some of that may be traders taking profit, but it’s difficult to tell. The flows in and out of these ETFs can swing quickly day to day. Just because they can provide tremendous upside doesn’t mean that the investors using them experience that upside. Timing matters, and that’s very difficult to consistently pull off.

Dive Deeper

Read more about what’s going on with ETFs this week:

• “Perpetual Futures and ETFs? Maybe?”
• “The Best Stock-Picker in Recent Years? The Marketing Department”
• Odd Lots: CME’s Terry Duffy on the Disconcerting State of Finance Regulation
• Schwab Asset Management to Launch the Schwab International Bond ETF