Most investors spend years thinking about how to build a portfolio. Far less time is spent thinking about how to get money out of that portfolio when they need it.
Then life happens.
Maybe you find a house before your current one sells. A tax bill comes due. You want to buy into a business, renovate a home, help an adult child, or make a large purchase without keeping hundreds of thousands of dollars sitting in cash.
The obvious answer is to sell some investments.
Sometimes, that is exactly what you should do. But selling isn’t free. Appreciated investments can create capital gains taxes, the sale can change your portfolio allocation, and once the money leaves the market, it stops participating in future market returns.
For investors with substantial taxable portfolios, there is another possibility: borrow against the portfolio instead.
Securities-backed lines of credit, margin loans, and a lesser-known strategy called a box spread loan can all provide liquidity without requiring you to sell the investments that created your wealth in the first place.
The trick is knowing when borrowing makes sense, which type of borrowing to use, and perhaps most importantly, when you should simply sell the investments and move on.
The Basic Question: Sell or Borrow?
Suppose you have a $3 million taxable investment portfolio and need $300,000.
You could sell $300,000 of investments. Simple enough. But imagine that the investments you sell have a cost basis of $150,000. You have now realized a $150,000 capital gain. Depending on your income, state of residence, and other tax circumstances, a meaningful portion of that gain could go toward taxes.
Borrowing offers a different trade.
Instead of realizing the gain, you use your investment portfolio as collateral and borrow the $300,000. Your investments remain in the account, no capital gain is triggered by the borrowing itself, and you retain exposure to the portfolio.
Of course, you now owe $300,000 plus the cost of borrowing it.
That’s the part that sometimes gets lost in discussions about securities-backed lending. Avoiding a capital gain doesn’t automatically make borrowing better.
The real comparison is broader: What does it cost to sell versus what does it cost, and what risks do you take, to borrow? That sounds like a small distinction, but it isn’t.
What Is a Securities-Backed Line of Credit?
A securities-backed line of credit, commonly called an SBLOC, allows you to pledge eligible investments as collateral for a loan. Unlike selling securities, you retain ownership of the investments. The lender gives you access to cash based on some percentage of the value of the pledged portfolio.
For investors who are asset-rich but don’t necessarily keep large amounts of cash sitting around, this can be useful. Imagine you’re buying a new home but haven’t sold your existing one yet. You need $500,000 for a few months and expect to repay it when the old house closes. Selling investments, generating capital gains, and then potentially reinvesting several months later may be an unnecessarily messy solution. An SBLOC can serve as a bridge.
Other potential uses include:
- Real estate purchases or renovations
- Large tax payments
- Business expenses or acquisitions
- Short-term liquidity while waiting for another asset to sell
- Situations where selling a concentrated or highly appreciated investment would create a substantial tax bill
The flexibility is appealing. So is the speed. Traditional bank lending can involve appraisals, income documentation, credit underwriting, and enough paperwork to make you reconsider whatever you were trying to buy in the first place.
Portfolio-backed lending can be considerably simpler. But there are catches.
Your Portfolio Is the Collateral
When you borrow against a house, the house secures the loan. When you borrow against an investment portfolio, the investments secure it. Unfortunately, stocks have a habit of changing value every day.
Suppose an investor has a $2 million portfolio and borrows $800,000 against it. Everything may look comfortable while markets are rising. Then stocks fall 30%. The portfolio isn’t worth $2 million anymore. The loan, however, didn’t fall 30%. You still owe the money.
That changing relationship between the portfolio and the debt is one of the biggest risks with securities-backed borrowing. If the collateral falls far enough, the lender or brokerage firm may require additional collateral or repayment. In some circumstances, securities can be forcibly sold to satisfy the requirement.
And Murphy’s Law has a nasty sense of humor here. A forced sale is most likely to become a concern after the portfolio has already fallen substantially, which is precisely when many investors least want to sell. That’s why we think the amount borrowed matters every bit as much as the interest rate. Just because a lender says you can borrow a certain amount doesn’t mean you should.
Then There’s the Interest Rate
Most traditional securities-backed lines of credit use a floating interest rate. That can be perfectly reasonable for short-term borrowing. If you need the money for six months, the difference between a 5% and 6% annual rate may not dramatically change the decision.
It becomes more important as the loan gets larger and lasts longer. A one-percentage-point difference on a $1 million loan is $10,000 per year. Over several years, that starts adding up. Floating rates also create uncertainty. Your loan may look inexpensive when you establish it and become considerably less attractive if short-term rates rise.
This is where an alternative strategy becomes particularly interesting.
The Box Spread Loan: Borrowing From the Options Market
“Box spread loan” sounds like something dreamed up by a derivatives trader after too much coffee. But the economic idea behind it is surprisingly straightforward.
A box spread uses four exchange-traded options to create a predetermined payment at a future date. Structured one way, an investor pays cash today and receives a known amount later. Structured the opposite way, the investor receives cash today and owes a known amount later. Economically, the second version behaves much like a loan.
Instead of borrowing money from a bank, you’re effectively borrowing through the options market. Box spreads have been used by institutions, hedge funds, and market makers for decades. More recently, they’ve become accessible enough that they can be practical for some individual investors as well.
At Suttle Crossland, we use specialized sub-advisors to implement these strategies for qualifying clients as part of a broader financial and investment plan.
Why Would You Use a Box Spread Instead of an SBLOC?
Cost is one primary reason. Because box spreads are priced through the options market, their implied financing rates tend to trade relatively close to institutional wholesale market interest rates. According to Cboe Global Markets, short box spreads can provide access to these wholesale financing rates and may offer lower borrowing costs than traditional securities-backed alternatives.
Then there’s the ability to fix the borrowing cost. Traditional SBLOCs generally have variable rates. Box spreads can be structured with a known maturity and borrowing cost. Depending on the strategy, terms can extend for several years. That gives an investor something many portfolio-backed loans don’t provide: certainty about the cost of the financing.
The Tax Treatment Can Be Interesting Too
With a traditional loan, you pay interest. Whether that interest is deductible depends on what you borrowed the money for and a collection of tax rules and limitations.
A properly structured box spread using certain broad-based index options can receive different tax treatment. Rather than being treated simply as loan interest, the economic financing cost may be reflected through gains and losses on Section 1256 contracts. Section 1256 generally applies a 60% long-term and 40% short-term capital gain or loss treatment, regardless of how long the position was held.
For an investor who already realizes substantial capital gains, that can potentially make the effective borrowing cost more attractive because those losses can offset gains. But this is an area where the details matter immensely. Tax treatment depends on how the transaction is structured and the individual investor’s circumstances. We always coordinate with a client’s CPA when using these strategies so everyone understands how the transaction should be reported.
So Why Doesn’t Everyone Do This?
Because complexity matters.
An SBLOC is relatively easy to understand: your brokerage assets secure a loan from a lender. A box spread involves an options position inside a margin-enabled brokerage account. Even though its economic payoff can be defined in advance, the machinery underneath it is more sophisticated.
There are also collateral requirements. Your portfolio still supports the borrowing, meaning a large market decline can create the same basic problem we discussed earlier. Market analysts frequently cite the asset-liability mismatch as the central risk: the amount owed on the box spread is defined, while the securities supporting it continue to fluctuate in value. In plain English, your stocks can fall, but your debt doesn’t disappear with them.
That’s why we generally don’t think of securities-backed borrowing as a way to squeeze every available dollar out of a portfolio. The strategy works better when there is plenty of breathing room.
A Margin Call Is Not the Time to Discover Your Risk Tolerance
Let’s say your brokerage firm will technically allow you to borrow 50% of your portfolio. Borrowing 50% doesn’t necessarily mean you have a prudent loan. It means you’ve discovered the brokerage firm’s limit. Those are two very different things.
A more thoughtful approach starts by asking what would happen during a serious bear market. What happens if stocks fall 20%? What about 30% or 40%? Could you post additional collateral? Could you repay part of the loan from another source? Would you be forced to sell investments?
If the entire strategy depends on the market behaving itself, we probably don’t have much of a strategy. This is why we model borrowing conservatively and maintain substantial collateral buffers. For larger or longer-term borrowing, it can also make sense to stagger maturities rather than have the entire obligation come due at once.
When Borrowing Against a Portfolio Can Make Sense
We tend to find portfolio-backed borrowing most compelling when three things come together:
- There’s a specific liquidity need.
- Selling investments has a meaningful downside (capital gains taxes, poor timing, or disruption of a larger investment strategy).
- There’s a credible repayment plan.
Borrowing $500,000 because you’re closing on a new house and expect $700,000 from another property sale in four months is a liquidity problem. Borrowing $500,000 because your lifestyle costs $100,000 more per year than your income is a spending problem wearing a very nice lending costume. Debt can solve the first problem quite well. It usually just postpones the second.
And Sometimes You Should Just Sell the Investments
This may sound strange coming from an article about securities-backed lending, but there are plenty of circumstances where we’d rather see an investor sell.
Maybe the tax cost is modest. Maybe the portfolio needs to be rebalanced anyway. Maybe the investor doesn’t have enough collateral to comfortably withstand a severe market decline.
There’s also an important economic reality: borrowing to avoid selling means you’re choosing leveraged investing. If you need $300,000 and refuse to sell $300,000 of stocks, you’re effectively deciding that remaining invested is worth the borrowing cost and additional risk. That decision might work wonderfully. It might not. Markets don’t promise to return more than your borrowing rate over the period you’re carrying the debt.
SBLOC, Box Spread, HELOC, Mortgage…or Just Sell?
This is ultimately where financial planning becomes more useful than product shopping. The question isn’t, “What’s the best loan?”
It’s, “What’s the best way to create $500,000 of liquidity given everything else happening in your financial life?”
For one family, that might mean realizing capital gains and paying the tax. For another, a HELOC might be cheap, easy, and perfectly adequate. Someone purchasing real estate may prefer a traditional mortgage because they want 30-year financing and don’t want their investment portfolio tied to the debt. And for someone with a large taxable portfolio, substantial embedded gains, adequate collateral, and a defined borrowing period, a box spread loan may offer a compelling combination of fixed rates, market-based pricing, and potentially favorable tax characteristics.
There isn’t one winner. That’s the point.
Liquidity Is Part of the Financial Plan
Investors understandably spend a lot of time thinking about return. But as wealth grows, liquidity becomes its own planning issue. You can have a multimillion-dollar net worth and still find yourself needing $300,000 on relatively short notice.
Planning for that possibility doesn’t necessarily mean leaving $300,000 sitting in cash for years. It means understanding where liquidity can come from before you need it. The goal isn’t to avoid selling investments at all costs, nor is it to borrow simply because sophisticated financing is available.
The goal is much less exciting: use the source of capital that creates the fewest unwanted consequences.
Sometimes that’s a sale. Sometimes it’s a loan. And occasionally, the best answer may come from a corner of the options market most investors never knew existed.
At Suttle Crossland Wealth Advisors, we evaluate securities-backed lending as part of a client’s broader investment, tax, and financial plan. For qualifying clients, we can also provide access through specialized sub-advisors to box spread lending strategies, including fixed-term and floating-rate structures. You can learn more about our approach to securities-backed lending on our website.