If you’re holding a highly concentrated stock position with a very low cost basis, diversifying in a tax-efficient manner can be challenging. Despite the many “creative” ideas often discussed, in practice the number of viable solutions is fairly limited.
At a high level, there are three primary approaches.
In an exchange fund, you contribute your concentrated stock into a pooled vehicle alongside other investors’ holdings and, in return, receive a diversified portfolio. Importantly, this structure is generally designed to avoid triggering capital gains at the time of contribution.
Eaton Vance is the largest and most established platform in this space, with over $60 billion in assets and a long operating history. They currently offer two funds—one with a $1 million minimum and another with a $500,000 minimum. Some structures may also allow a portion of the original cost basis to be returned as return of capital.
Goldman Sachs also offers exchange funds (approximately $20 billion in assets), though access and flexibility tend to be more limited. The typical minimum is $1 million.
If the objective is to diversify quickly and cleanly without immediate tax consequences, exchange funds are often the most compelling option.
One important nuance: for very popular stocks (e.g., large-cap tech names such as NVDA, AAPL), exchange fund manager’s appetite may not always be available at any given moment. That said, opportunities often arise quarterly due to fund rebalancing or redemptions. This makes it critical to work with an advisor who is highly experienced in this area and able to act quickly when availability opens.
2) Direct Indexing with Tax-Loss Harvesting
Direct indexing can also play a role, but it is generally a gradual solution, rather than an immediate one.
Long-only direct indexing has become widely available and can generate meaningful tax losses over time, though results vary. In practice, long-only strategies may harvest approximately 40–50% of losses over several years.
Long/short direct indexing accelerates loss harvesting, but still requires time and market movement. With higher leverage, a long/short strategy can potentially harvest more than 50% of losses in the first year and exceed 200% cumulatively over several years.
Providers such as AQR and Quantinno are among the more established players in this space, with many additional firms planning to offer similar strategies. Typical minimums are around $1 million, and costs depend on the level of leverage used. Some investors choose to use higher leverage in the early years to offset large capital gains from a liquidity event, then reduce leverage as portfolio concentration declines.
One important limitation: if you are still employed by the issuing company, restrictions on pledging shares as collateral may prevent the use of some of the strategies. It is essential to understand employer policies before pursuing this approach.
3) Derivative-Based Strategies
Derivative solutions—such as collars or prepaid variable forwards—can be used to hedge or monetize a concentrated position.
While effective in certain circumstances, these strategies involve greater complexity, counterparty risk, and legal structuring. As a result, they tend to be more situational and less straightforward than exchange funds or direct indexing.
Key Takeaway
If the primary goal is to diversify a concentrated position without triggering immediate taxes, exchange funds are often the fastest path.
Other approaches can work, but they generally involve trade-offs related to timing, complexity, or implementation constraints. Ultimately, the right strategy depends on how quickly diversification is needed and how much structural complexity an investor is willing to accept.
Important Disclosures:
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.