Brian Jacobs of Aptus Capital Advisors tells InvestmentNews how structural innovation and smarter equity risk-taking are shaping the ETF market.
Actively managed ETFs are gaining momentum as investors seek differentiated returns and better tax outcomes.
Brian Jacobs, portfolio manager and investment strategist at Aptus Capital Advisors tells InvestmentNews that passive investments still have a place and there is opportunity for those that seek it in the right places.
“Passive strategies make sense as core exposures… However, we believe the market portfolio has the opportunity for enhancement,” Jacobs says. He adds that “specific market areas are less efficient and offer opportunities for improvement. Fixed income is a prime example,” and that thoughtful derivative-based approaches can “improve diversification and downside protection,” helping investors remain resilient when staying allocated to risk assets.
Tax considerations are increasingly shaping portfolio construction and Jacobs warns that while Treasury ETFs benefit from state tax exemption, “Treasuries are still tax-inefficient given coupon payments are taxed at ordinary income rates at the federal level, even in years where the total return is negative.”
As an alternative, he sees potential in strategies that access “bond-like economic exposure and/or diversification benefits while potentially deferring gains through structures that are more reliant on equities and options strategies,” allowing capital gains to be deferred and taxed at lower rates over time.
Jacobs notes that mutual fund–to–ETF conversions are widening access and improving after-tax returns because “the ETF creation and redemption mechanism allows for ‘in-kind’ redemptions, which helps minimize taxable capital gain distributions to shareholders.”
This shift, he says, “offers investors superior after-tax returns” while making “established, active mutual fund strategies available in an ETF format,” supporting innovation across the asset management landscape.
Options-based strategies are another tool advisors can use to keep clients invested during volatility.
“Buffered ETFs, along with equity-hedged strategies, give investors the opportunity to hold a higher equity allocation than they might otherwise tolerate because of the embedded downside protection during market sell-offs,” Jacobs explains. These structures also “can be improved relative to traditional equity approaches and are significantly more tax-efficient than mixing stocks and bonds to reduce risk,” making equity exposure “more livable and, therefore, more investable.”
Jacobs highlights the impact of design innovations such as multi-share class ETF approvals, which allow mutual funds to add more tax-efficient ETF share classes. The structure “can cleanse the portfolio of high-cost-basis securities without triggering capital-gain realization,” benefiting both mutual fund and ETF shareholders. But he cautions that “ETF share-class investors may assume tax risk created by investors and investment actions in the mutual fund share class” — a structural nuance that advisors must weigh.
When it comes to more specialized tools, Jacobs acknowledges that Section 351 conversions can be powerful for investors with large, embedded gains because they allow a shift into ETF exposure “via an in-kind creation,” avoiding a taxable event. However, he says these transactions “can be arduous and restrictive… involve planning, documentation, compliance, and coordination with tax professionals,” and likely won’t become a mass-market solution without simplification.
Crypto ETFs are drawing advisor attention, and Jacobs believes their role is about balance: “Crypto ETFs are not solely about risk; they are about risk and reward.” While ETFs can “reduce operational and custody risks” and costs versus direct crypto ownership, he warns that “the bigger risks today lie in product design,” where “niche or overly engineered crypto products may introduce risks that do not justify the stated benefits.”
More broadly, Jacobs sees the greatest opportunity in ETFs offering outcomes not previously available in this wrapper: “Meaningful value is created when existing strategies or asset classes are reengineered to benefit from the structural advantages an ETF provides.” He specifically highlights strategies using options “to deliver specific outcomes and returns with greater tax efficiency than owning stocks and bonds.”
Still, advisors should proceed carefully when selecting new ETFs. Jacobs stresses that professionals must understand exposure, market behavior, and taxes because “there is a wave of new ETFs that are extremely tax-inefficient or market themselves using yield metrics that are unrealistic.” Even sound long-term investments can follow “return paths that may feel uncomfortable in the short term,” and ETFs should ultimately “support good investor behavior through both good and bad markets.”
Aptus recently launched a low-cost buffered ETF series to provide hedged equity exposure efficiently. “We believe these products have simply been too expensive,” Jacobs says, noting their aim to deliver “a useful tool without the unnecessary cost burden that has historically weighed on the category.” At 25 basis points, Aptus sees the lineup as meeting demand at the right price point while furthering the evolution of risk-managed equity solutions.