ETF Loophole, Superabundance Example, More Nuclear

ETF Loophole

My primary focus in writing these articles is to document emergent trends and share my perspective about their implications. Emergent trends cannot be systematically predicted. They are spontaneous evolutions based on changes in the underlying foundational rules that precede something flourishing into an entirely new field.

In this case, I see a massive upcoming emergent opportunity created by the rules that govern the ETF structure. ETFs can trade their underlying stocks in a tax-efficient manner. When the S&P 500 ETF, SPY rebalances, it adjusts positions with minimal tax implications.

The 1031 exchange in real estate investing is famous as a unique and valuable benefit. It allows you to sell one building and buy another without paying capital gains. The clear benefits of the 1031 exchange, buying and selling without taxes, are not directly available to stock market participants.

The emergent trend here is that wealthy individuals are starting to launch their own ETFs and roll their stocks into them to trade more tax-efficiently. The current recommended limit for something like this is a $50 million minimum total size, which I recognize is out of the scope of all but a small, fortunate few. However, technology makes everything cheaper, so I see this limit potentially falling to $10 million in the coming years.

In short, ETFs can buy and sell stocks in a tax-efficient manner while accumulating gains at a single tax basis that isn’t realized until a final sale, somewhat similar to how a 1031 exchange defers taxes in real estate. Ultra-high-net-worth investors can launch their own ETF with their own assets that will allow them to buy and sell stocks with deferred taxable gains until they sell the ETF itself. If this process becomes more accessible and the costs fall, it could become more common in the wealth management industry. Alternatively, regulatory changes might impact the viability of this strategy before it becomes widespread. Either way, this is a super interesting and promising development. This strategy is known as a Section 351 transfer.

The extended implications are also interesting. By launching your own ETF, you are opening your portfolio management decisions for others to follow. Investors can now buy shares of your ETF, aligning their assets with your personal investment strategy and potentially benefiting from your investment management.

Superabundance example

In Jan 2020, lab-grown vs natural diamond sales were 10% vs 90%. In 2024 lab-grown crossed the tipping point, now making up 56% of diamond sales and trending higher. The speed of that transition is notable. When people say the world is changing fast, this is an excellent example of what they mean. Diamonds have always been a faux scarcity asset, with producers tightly controlling supply to maintain scarcity. Aggressive marketing efforts to maintain a premium on natural diamonds persist today, but that’s ultimately a losing game. The ultra-long term view is that lab-grown diamond technology may become so cheap and abundant that future iPhone screens will be made of diamond.

I’ve been working through a book recommended by a friend called Superabundance. The concept is rooted in deeply optimistic views of technology and progress, and if you regularly read these articles, you know I share that view. I’m aware that being overly optimistic can sometimes be just as bad as being overly pessimistic in that you can become complacent about the true nature of the constraints we still have to overcome. Either way, I like to document superabundant futuristic trends because they are hugely impactful and fun to watch unfold.

Related to port strikes, dock workers protested against the introduction of shipping containers when they were originally introduced in the 1950s and 1960s. Containers lowered the cost of offloading cargo from $6/ton to $.16/ton, allowing global shipping volumes to expand exponentially due to lower costs.

More Nuclear

The DOE Department of Energy published a report this week called The Pathways to Commercial Liftoff: Advanced Nuclear. You can find it here. This paper is part of a massive turnaround effort that has been largely successful, and it marks the beginning of a new era for nuclear energy. Here are a few of my comments after reading through this and pairing it with other comments.

• This is not in the report, but recall that Germany shut down all of its nuclear power plants and then experienced a parabolic spike in energy prices due to the Russian invasion of Ukraine. Had they kept their nuclear plants online, they would not have risked economic disaster due to bad energy policy.
• As recently as 2022, US utilities were actively shutting down nuclear reactors. In 2024, they are extending reactor life, uprating capacity and restarting formerly closed reactors.
• The US has 94 reactors at 54 sites, which generate 20% of the US’ electricity. 90% of those were built in the 70’s and 80’s. We have only commissioned three new reactors this century. Out of those 94, nearly all of them are different. This plan emphasizes standardization going forward.
• This report lays out a detailed plan for how the private sector can build or invest in tripling nuclear capacity by 2050. To support construction, operations, and the supply chain, we need to grow our nuclear workforce by an estimated 375,000 people from 100,000 today.
• This plan suggests the company that takes on this challenge should prepare to build at least 5-10 reactors so that we can restart the learning and efficiency fly-wheel.
• Nuclear does not displace or compete with renewable energy
• Nuclear produces the most electricity per acre of any energy source. 57,000 MWh/year per acre vs 200 MWh/year for solar.
• Along with producing electricity, nuclear also produces “firm” heat. Firm in the context of energy means reliable. Data centers require five 9’s of reliability, 99.999% uptime. Chemical plants and refiners also require reliable (“firm”) heat to continuously run their production processes.
• LCOE – Levelized Cost of Energy is how we translate the cost of building energy infrastructure into the per unit cost of energy that it produces to then sell. I alluded to this last week. LCOE typically spans 30 years and is more focused on the cost of construction. Nuclear plants will last 80 years and their valuation needs to include the additional 50 years after the capex instruction costs are recovered. This report suggests power would cost $50-$150/MWh to the owner during the first 30 years and $30-35/MWh in the following 50 years. These plants can become highly profitable in the 50 years after the construction payback period.
• Incumbent utility players will likely be the first movers but will also likely need partners to raise enough capital. Various government programs have set aside subsidies and loan programs for low-interest rate loans to support this eco-system.
• If any country does not want to be dependent on Russia or China for nuclear leadership and technology, they will look to the US as a clear leader in this space.