Cambria Investment Management announced on November 11, 2025, that it would launch the Cambria US Equal Weight ETF, ticker USEW, as its fourth fund to accept seed assets through a Section 351 exchange, according to the firm's announcement. The structure lets investors contribute a portfolio of appreciated securities to a brand-new ETF in exchange for fund shares, generally without recognizing capital gains at the time. What began as a niche technique in late 2024 has become a steady pipeline of launches aimed at taxable investors with large embedded gains.
What changed
Section 351 of the tax code has existed for decades and is usually associated with people forming a corporation by contributing property. Because ETFs are organized as investment companies, the same rule can apply when a group of investors transfers securities to a fund at its launch. The early wave, as Kitces.com documented, included the Stance Sustainable Beta ETF in November 2024, the Cambria Tax Aware ETF in December 2024 and the Longview Advantage ETF in February 2025. Financial Planning reported that the Cambria Tax Aware ETF held $32.5 million in net assets in late January 2025, a small start that nonetheless showed the mechanics worked.
According to Cambria's fund page, USEW is an actively managed fund holding large US companies without traditional market-cap weighting, with the goal of reducing concentration. It lists a total expense ratio of 0.30% and began trading on December 18, 2025.
Who is affected
The audience is investors who hold taxable accounts full of low-basis stock: long-time owners of mega-cap technology shares, heirs whose portfolios have grown since a step-up, and executives who have accumulated a mix of positions over many years. Many are overweight a handful of names and reluctant to sell because of the tax cost. A 351 exchange does not eliminate that gain. It postpones it while moving the money into a diversified, professionally managed fund.
The after-tax math
Three conditions do most of the work, as summarized by Kitces.com. The contributors, as a group, must own at least 80% of the fund immediately after the exchange. The contributed portfolio must pass a diversification test: no single holding above 25% of its value and the five largest holdings no more than 50%. ETFs within the contributed portfolio are looked through to their underlying stocks for that test. And the investor's original cost basis carries over to the new ETF shares, so the deferred gain is still there, embedded in the fund shares.
Example, with round numbers: an investor holds a $2 million portfolio of 15 stocks with a combined basis of $500,000. The largest position is 20% of value and the top five total 48%, so the portfolio passes the 25/50 test.
| Approach | Sell and buy a fund | 351 exchange |
|---|---|---|
| Capital gain recognized now | $1,500,000 | $0 |
| Tax cost, assuming a 25% combined rate for illustration | $375,000 | $0 now |
| Amount invested in the new fund | $1,625,000 | $2,000,000 |
| Basis in new shares | $1,625,000 | $500,000 |
The 25% figure is an assumption standing in for federal capital gains and investment income taxes plus any state tax; actual rates depend on income and residence. The difference is the $375,000 that stays invested; the trade-off is that the full gain remains taxable when the ETF shares are eventually sold, unless they are held until death or given to charity.
Moves to discuss with your advisor
- Whether a specific portfolio meets the 25/50 test on the contribution date, since a failed test can make the whole transfer taxable.
- How a fund's expense ratio compares with the value of deferral over a realistic holding period. Kitces.com noted early 351 funds charged around 0.49%.
- How the new fund's strategy overlaps with remaining holdings, and whether its turnover could generate taxable distributions.
- Alternatives for positions too concentrated to qualify, such as exchange funds or charitable strategies.
What to watch
Each 351 launch has a contribution window and paperwork deadlines set by the sponsor, and early funds have been small. The key questions for 2026 are whether larger asset managers adopt the structure, whether custodians report basis correctly after the exchange, and whether the IRS issues any guidance on how these conversions are being used at scale.
Sources
- First reported Cambria to Launch US Equal Weight ETF (USEW), Fourth Cambria ETF with Innovative 351 ETF Exchange Feature — Business Wire / Cambria
- Cambria US EW ETF (USEW) — Cambria Investment Management
- Using Section 351 Exchanges To Tax-Efficiently Reallocate Portfolios With Embedded Gains — Kitces.com
- Section 351 conversion ETFs promote investment tax strategy — Financial Planning
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
