If you’re holding a substantial portion of stock in one company, figuring out how to lower your risk while avoiding a hefty tax bill can feel overwhelming. That’s where exchange funds come in—they let you diversify your investments without having to sell your shares right away.
Recently, one of our founding partners, Vishal Kumar, sat down with Cache CEO Srikanth Narayan to talk about exchange funds, who they’re best for, and what’s happening in the market. Check out the conversation below:
What’s an Exchange Fund?
An exchange fund (also called a swap fund) is a way to trade your concentrated stock holdings for a diversified portfolio—without triggering an immediate tax event. Instead of selling and paying capital gains taxes upfront, you contribute your shares to the fund and receive units in return.
For example, Cache’s Exchange Fund is designed to track the Nasdaq-100, giving investors exposure to a mix of high-growth companies. Cache has made this process more modern and accessible while keeping everything compliant with tax laws.
Who Should Consider an Exchange Fund?
Exchange funds are a great fit for:
- Tech employees whose stock compensation has grown significantly and now makes up a large portion of their net worth
- Long-term investors willing to commit at least seven years to fully benefit from tax deferral
- Accredited investors looking to diversify their portfolio without selling their stock and triggering capital gains taxes
How Do Taxes & Cost Basis Work?
One of the biggest benefits of exchange funds is the ability to defer capital gains taxes. Instead of selling your stock and paying taxes immediately, you contribute your shares and receive units in the fund. Your tax bill is postponed until you eventually sell those units.
A few key things to keep in mind:
- The tax is deferred, not erased—you’ll owe it when you sell your fund units
- Exchange funds must allocate at least 20% of assets to “qualifying investments” (like real estate) to maintain their tax benefits
How Do Exchange Funds Reduce Risk?
Exchange funds are structured to promote diversification and help manage certain risks. Here’s typically how:
- Independent Fund Structure – Each exchange fund is a legally separate entity, meaning it’s not tied to the financial health of the sponsoring institution (e.g., Cache). A third-party bank serves as custodian, while independent auditors and administrators oversee fund operations.
- Diversification – By pooling stock from multiple investors, the fund spreads risk across different sectors and industries, reducing the impact of a single company’s performance.
- Qualifying Asset Requirement – To comply with IRS rules, at least 20% of assets must be in illiquid investments like real estate, adding stability and potential income.
- Experienced Management – Professional fund managers balance passive and active strategies, adjusting to market conditions and corporate actions to maintain the fund’s performance.
- Regulatory Compliance – Institutions running exchange funds must meet strict SEC regulations, ensuring transparency and reducing counterparty risk.
Final Thoughts
Exchange funds are an elegant solution for individuals who want to diversify their portfolios, defer taxes, and manage risk—all without selling their stock upfront. If your net worth is tied up in one company’s shares, this might be worth exploring.
Got questions? Feel free to reach out or schedule a call—we’re happy to help.
Disclosure: Investment advisory services are offered through Twin Peaks Wealth Advisors, a registered investment advisor. The information provided is for educational purposes only and should not be construed as personalized investment, tax, or legal advice. All investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Please consult a qualified professional before making any financial decisions.
