The primary benefit of this arrangement is to diversify a large stock position without triggering a "taxable event".
When the diversified holdings are eventually sold, tax will be due on the difference between the sales price and the original cost basis of the contributed stock.
Historically, exchange funds have been offered primarily by two major investment firms, specifically for their ultra-wealthy clients.
Proponents argue that exchange funds help with this significant deadweight loss as holders of appreciated stock can diversify and liquidate their positions, re-injecting this capital into the economy.
For example, public figures like politician Mitt Romney[8] and businessman Eli Broad[9] have been identified as using exchange funds to reduce their tax obligations.