Separately managed account (SMA) to exchange-traded fund (ETF) conversions under Section 351 of the Internal Revenue Code are attracting renewed interest across the asset management industry. Once viewed primarily as a niche tax-deferral mechanism, these conversions are now being evaluated more broadly as a strategic tool that can reshape operating models, accelerate product scale and expand distribution reach. Firms must determine whether converting SMA assets into an ETF structure aligns with long-term business and product strategy.
ETFs have become a preferred vehicle across advisory and institutional channels for their liquidity, transparency and accessibility. At the same time, SMA programs have grown increasingly complex, often spanning multiple custodians, bespoke tax profiles and varying degrees of portfolio customization. While these features offer client-specific benefits, they also introduce operational friction and rising costs that become harder to justify as firms scale.
Against this backdrop, SMA-to-ETF conversions are being reconsidered as more than a tax-efficient transaction. They are now seen as a way to rationalize portfolios and modernize infrastructure. For asset managers exploring new ETF launches, the ability to seed funds with existing SMA assets is compelling. Platform minimums, early liquidity expectations and competitive time-to-market pressures have raised the bar for new products. Pre-seeded ETFs can reach meaningful scale faster, improving their odds of platform acceptance and long-term viability.
Beyond launch economics, conversions can address structural tensions that often emerge between individualized SMA management and centralized portfolio strategy. Over time, customization at the account level can lead to drift from the intended investment mandate and across client experiences. Moving assets into a single ETF portfolio can restore consistency, reinforce investment discipline and simplify ongoing oversight.
From an operational perspective, the benefits can be equally significant. Consolidating assets into an ETF wrapper reduces the need to manage thousands of distinct tax lots and account-level variations. This simplification supports scalability, lowers servicing costs and enables teams to focus on higher-value activities such as product development and distribution support rather than bespoke account maintenance.
Key strategic advantages frequently cited by firms pursuing SMA-to-ETF conversions include:
- Faster paths to scale, as seeded ETFs are more likely to achieve early liquidity and meet platform requirements.
- Improved portfolio alignment, reducing divergence between SMA implementations and core investment strategy.
- Operational simplification with fewer accounts, cleaner data structures and more standardized processes.
- Expanded distribution opportunities, enabling access across a broader range of advisory platforms and client segments.
However, these benefits are not automatic. Not all SMA programs are suitable candidates for conversion, and the execution requires careful planning. Eligibility depends on factors such as portfolio diversification, asset composition and the availability of clean, complete cost-basis data. Incomplete historical records or inconsistencies across custodians can complicate both the conversion itself and downstream servicing.
It is also important to recognize the limits of the tax benefit. The deferral advantage typically applies only at the point of conversion. While meaningful, it should be viewed as one component of a broader value proposition rather than the sole driver of the decision. Firms that approach conversions as isolated tax events risk underestimating the organizational coordination required across tax, legal, operations, distribution and client communication teams.
This is why leading firms increasingly frame SMA-to-ETF conversions as enterprise initiatives. In addition to asking whether a conversion is feasible, firms are now also asking how a conversion supports long-term wrapper strategy and operating model design. Questions around post-launch readiness are critical. Supporting an ETF requires durable infrastructure for accounting, tax reporting, regulatory compliance and ongoing distribution engagement.
Looking ahead, SMA-to-ETF conversions are likely to sit within broader multi-wrapper strategies. As asset managers operate simultaneously across SMAs, ETFs, mutual funds and alternative vehicles, the ability to deliver wrapper-agnostic servicing and integrated data becomes a competitive differentiator. In this context, conversions are less about moving assets from one vehicle to another and more about building flexibility into how products are structured, scaled and supported over time.
As firms evaluate SMA-to-ETF conversions, having the right operating infrastructure in place is critical. Supporting these initiatives requires coordinated expertise across fund accounting, tax, transfer agency, custody integration and post-launch servicing; areas that are often managed across multiple providers. Asset managers increasingly look to partners that can support ETF launches and ongoing operations within a broader, multi-wrapper operating model.
When executed intentionally, SMA-to-ETF (351) conversions can do far more than defer taxes. They can accelerate growth, streamline operations and position firms to compete more effectively in an increasingly ETF-centric marketplace. Success depends on viewing the conversion as a catalyst within a longer-term strategic evolution.
View our "Converting SMA Assets into an ETF Through a 351 Exchange" infographic to learn more.
