Meet the First Exchange Fund for Growth Investors

Exchange funds have been around for quite some time (nearly a century, in fact). Finally, they’ve gotten an exciting upgrade, with the introduction of the Cache Exchange Fund, a modern, growth-oriented solution for investors. The timing could not be better.

Exchange Funds, a Quick Primer

Not to be confused with exchange-traded funds, exchange funds aim to solve the problem of concentrated stock positions. A portfolio dominated by one or two equities risks significant drawdowns that can wreak havoc on an investor’s net worth. In addition, given that concentrated positions often arise due to large unrealized capital gains, selling the securities usually triggers a substantial near-term tax bill.

Enter exchange funds to offer a solution. Here’s how they work: Qualified investors contribute their concentrated stock into a single pool. In return, they each receive a pro-rata share of the fund. Per the current IRS tax code (IRC 721), this exchange into a properly structured fund is not deemed to be a disposition, so the investors are able to diversify their holdings without triggering a taxable event. (There are important details to be aware of, though: For example, you must hold your investment for at least seven years before you can withdraw a diversified basket on a tax-deferred basis.)

The Problems with Legacy Exchange Funds

Clubs often exist to keep some people out, and legacy exchange funds have been no different. Indeed, they’ve mostly been the preserve of ultra-wealthy investors, as the providers of these vehicles have limited access to those with at least $5 million in investable assets and a private wealth relationship.

Another issue with legacy exchange funds is that they typically aim to mimic, to a certain extent, the performance and construction of broad indices such as the S&P 500 or the Russell 3000. As such, their ability to absorb shares of growth equities is somewhat limited due to capacity constraints.

The Right Fund at the Right Time

An innovative exchange fund aims to make these solutions both more accessible and geared towards growth stocks. The Cache Exchange Fund is available to both  Accredited Investors and Qualified Purchasers, meaning that to qualify an individual only needs an annual income of $200,000 ($300,000 for couples), or a net worth of $1 million excluding a primary residence. Fees associated with the Cache Exchange Fund are significantly lower than legacy funds, which makes them comparatively attractive.

Meanwhile, Cache’s offering is the first exchange fund benchmarked to the Nasdaq-100 Index®. The Nasdaq-100®, established in 1985, showcases 100 of the top non-financial stocks listed on Nasdaq, with a market cap of $27 trillion. According to Cameron Lilja, VP and Global Head of Product & Operations at Nasdaq, “The Nasdaq-100® initially emphasized technology, but has evolved to include growth-focused companies in other industries such as consumer discretionary, telecommunications, and healthcare. The Nasdaq-100® has inspired investors globally, with over 90 products available in more than 20 countries. We are pleased to work with Cache in expanding its ecosystem with the first exchange fund benchmarked to the Nasdaq-100.”

This feature is timely, given the 15-year bull market we’ve seen for equities (albeit with some hefty corrections along the way). Many investors are sitting on considerable unrealized gains if they purchased shares of the so-called Magnificent 7, for instance. For other investors, concentrated positions have arisen due to the growth in stock-based compensation.

The Cache Exchange Fund both disrupts the exchange fund space and serves as a complement to existing funds. More choice for more investors—what’s not to like about that?

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