Exchange traded funds (ETFs) are a popular alternative to mutual funds for investing in a diversified pool of securities. One reason for ETFs’ popularity is that they are far more tax-efficient than mutual funds. Unlike mutual funds, most ETFs make virtually no capital gains distributions—which would be taxable to the recipient shareholders—in a typical year. The reason is the way that ETFs are able to take advantage of section 852(b)(6), which permits regulated investment companies (RICs) to deliver appreciated portfolio securities to redeeming shareholders without recognizing any gain. Because of the way they are structured, ETFs are able to redeem institutional investors “in-kind” in the normal course of their operations, while mutual funds generally need to satisfy shareholder redemptions in cash. The original purpose of section 852(b)(6) was to enable traditional mutual funds to satisfy redemptions in-kind under extraordinary circumstances in which cash redemptions could cause the funds undue harm. But ETFs now use section 852(b)(6) to avoid recognition of virtually any of their investment gains. This use provides ETF investors with an unwarranted tax break that mutual fund investors and direct investors in securities do not enjoy, and it constitutes a costly and indefensible tax expenditure. To eliminate this inequitable and expensive loophole in the current law, section 852(b)(6) ought to be revised in a way that prevents ETFs from continuing to use the measure to circumvent any and all capital gains taxation. This article recommends amending section 852(b)(6) to incorporate a rule that would reduce an ETF’s basis in its remaining portfolio securities by the amount of its excluded gain on an in-kind-redemption distribution. Under the proposed rule, an ETF would subsequently recognize portions of the previously-excluded gain when it sells portfolio securities in taxable sales. As a result, ETFs would no longer be able to escape ever recognizing any of their investment gains. Instead, taxation of much of their gain would merely be deferred—not avoided for all time.