Commodity ETNs have benefited from a tacit Internal Revenue Service understanding that they should be taxed like other “prepaid forward contracts,” which means they are taxed like equities. The notes are not marked-to-market at the end of each year, and more importantly, if you’ve held the notes for more than one year before you sell, any gains are taxed at the long-term capital gains rate, which currently maxes out at 15 percent.
The IRS has never officially acknowledged that ETNs qualify for this treatment, but it has never officially ruled otherwise, and this “pocket veto” has been seen as tacit agreement.
Unlike ETNs, however, the new ETFs will have limited credit risk. In an ETN, the full value of the note is dependent on the good faith and credit of the issuer. The swaps underlying these new ETFs will be fully collateralizing, meaning the opposing party will have to put up the full value of the swap in a separate account maintained by a third-party custodian. That should eliminate most credit concerns.
If the new funds can deliver the tax efficiency of commodity ETNS without the credit risk, they may be a big hit.
ETF Securities wouldn’t comment on the filing, as is the norm; ETF companies are essentially prohibited from commenting on funds still in registration.
Another SEC Filing
Separately, ETF Securities has filed for an ETF that would hold a basket of “white metals.” The fund will hold silver, platinum and palladium bullion.