The IRS "Coupon" You're Not Using: How to Generate Low Risk 4% Tax-Free Returns Without Touching Muni Bonds

Municipal bonds are often marketed as the safe, tax efficient corner of fixed income. In many cases, that reputation is deserved.

Most municipal bonds are investment grade and backed by relatively stable sources of revenue such as property taxes, toll roads, or utility payments. However, the municipal bond market is far from uniform, and many investors underestimate the risks that exist beneath the surface.

The main one is interest rate sensitivity. If you held municipal bonds through 2022, you likely saw losses that rivaled equity markets. The reason comes down to duration, which measures how sensitive a bond is to changes in interest rates.

Bonds with longer maturities tend to have higher duration. When interest rates rise, the prices of those bonds fall so that their yields adjust to the new rate environment. When rates fall, the opposite happens and bond prices rise. But the rapid rate increases in 2022 caught many investors off guard and exposed how vulnerable long duration bond funds can be.

So if you are in a high income tax bracket, have already filled your tax advantaged accounts such as a Roth IRA, and still want a place to park cash while earning a return that keeps up with inflation, what are the alternatives?

There is one unusual option that many investors have never heard of.

It is the Alpha Architect 1-3 Month Box ETF (CBOE:BOXX), and it works very differently from traditional Treasury or municipal bond ETFs. Instead of owning bonds, the strategy uses the options market to replicate the return of short term Treasury bills in a much more tax efficient way.

Here is how it works and how it may allow investors to generate returns near 4% while potentially avoiding the tax treatment associated with many other cash alternatives.

BOXX is a Treasury ETF in name only. It does not actually hold T-bills or other government bonds. Instead, the strategy relies on a sophisticated options trade known as a box spread.

A box spread is a multi leg options strategy built from a combination of call and put options with the same expiration date but different strike prices. In the case of BOXX, the strategy uses options on popular S&P 500 and Nasdaq-100 ETFs.

The structure works by combining a bullish vertical spread with a bearish vertical spread. First, the strategy buys a call option at a lower strike price and sells a call option at a higher strike price. Then it simultaneously buys a put option at the higher strike price and sells a put option at the lower strike price.

When these four positions are combined correctly, the result is a defined payoff at expiration that does not depend on where the underlying asset finishes. Whether the market rises, falls, or moves sideways, the payout of the position is fixed. Because the outcome is predetermined, the trade behaves much like a short term loan.

In practice, box spreads can be used in two ways. Investors can structure them to earn something close to the risk free rate, or they can use them to borrow money at roughly the risk free rate. The latter is why box spreads are frequently used by large institutions and professional traders.

What BOXX does is package box spreads into an ETF wrapper. This allows the fund manager to manage the option positions on the back end while investors simply buy and hold the fund like any other ETF. Alpha Architect handles the construction and rolling of the box spreads, while investors receive the resulting return profile.

Because BOXX does not actually hold Treasury securities, it does not receive traditional interest payments. Instead, the return compounds internally as the options positions move toward their defined payout at expiration. If you look at the long term chart, the result appears as a steady upward sloping line that closely tracks short term interest rates.

Since the strategy does not distribute interest in the traditional sense, the usual 30 day SEC yield is not the best way to measure expected returns. Instead, investors should look at the average yield to options expiration, which reflects the expected return of the current options positions held by the fund.

As of March 4th, 2026, that figure sits at about 3.98%. In practice, it tends to hover in the mid range of the federal funds rate. As of February 28, 2026, the ETF has delivered a 4.86% annualized return over the trailing three years based on net asset value.

Despite using a sophisticated options strategy, BOXX is priced competitively compared with many traditional Treasury ETFs. The fund has a gross expense ratio of 0.2449%. Alpha Architect currently applies a 0.05% fee waiver, which brings the net expense ratio down to 0.1949%.

Where BOXX stands out most is tax treatment. Because the ETF does not actually hold Treasury securities and does not distribute regular interest payments, investors can potentially defer taxes by simply holding the ETF. The returns accumulate within the fund rather than being paid out each month.

By contrast, most Treasury ETFs distribute interest regularly. Those payments are typically exempt from state income taxes but remain subject to federal income taxes. For investors in higher brackets, that recurring tax drag can meaningfully reduce after tax returns.

However, there is one important asterisk: BOXX has made a capital gains distribution before. This is related to the accounting treatment of the options positions inside the fund. The mechanics of managing and rolling box spreads within a registered investment company can occasionally trigger realized gains.

In fact, the fund paid a distribution on August 13, 2024, payable August 14, 2024, totaling $0.2906 per share. Of that amount, $0.1678 was classified as long term capital gains and $0.1228 as short term capital gains.

The distribution was relatively modest, but it highlights an important point: while the structure can be highly tax efficient, distributions are still possible depending on how the options contracts are managed and rolled within the portfolio.

Since that event, the fund has not made another capital gains distribution. Still, investors should understand that the possibility exists. But even with this caveat, BOXX can still be more tax efficient than many traditional cash alternatives. The strategy reduces the frequency of taxable income events and allows gains to compound inside the fund for longer periods.

That said, BOXX’s structure is unusual. Some investors may find the options strategy overly complex or simply prefer a more straightforward approach. If that is the case, traditional Treasury ETFs remain a perfectly reasonable alternative. They are simple, transparent, and typically carry very low fees.