US-Listed ETFs Sorted by Asset Class and Year-to-Date Return

More documents

Recommendations

Info

Commodity ETFs from page 1 term capital gains rate of 15 percent, with the remaining 40 percent taxed at the investor’s ordinary income rate, regardless of how long the shares are held. This comes out to a blended maximum capital gains rate of 23 percent. Limited partnership ETFs are also considered pass-through investments, so the trust is “marked-to-market” at the end of each year. Any gains accrued are passed on to its investors, potentially creating a taxable event. This means that your cost basis adjusts at year-end and you can be subject to pay taxes on gains regardless of whether or not you sold your shares. Finally, for tax reporting, limited partnership ETFs also generate a Schedule K-1 form. These forms often create uncertainty and annoyance for the average investor not familiar with K-1s when they receive these forms in the mail. These forms can also be mailed out later than 1099s, which can add to frustration on the part of some investors looking to get their taxes out of the way early. Exchange-Traded Notes Limited partnerships may seem complicated, but they’re not the only option. In fact, of the 135 commodity products available as of Oct. 31, the vast majority—87—are actually ETNs. Instead of holding physical commodities or futures, ETNs are unsecured, unsubordinated debt notes issued by banks that promise to provide the return of a specific index. This means they carry credit risk: If the bank issuing the note goes bankrupt or defaults, investors can lose their entire investment. Popular commodity ETNs include the iPath Dow Jones UBS Commodity ETN (NYSE Arca: DJP), the Elements Rogers International Commodity ETN (NYSE Arca: RJI) and the iPath S&P GSCI Crude Oil ETN (NYSE Arca: OIL). From a tax standpoint, ETNs have some distinct advantages for longterm investors. They’re currently taxed like equity funds and get reported on a 1099 form—long-term gains are taxed at 15 percent (note that this is for commodity ETNs; currency ETNs are taxed differently). Grantor Trusts The final structure—grantor trusts— are used for “physically held” precious metals ETFs, such as the SPDR Gold Trust (NYSE Arca: GLD), the iShares Silver Trust (NYSE Arca: SLV) and the ETFS Physical Swiss Gold Shares (NYSE Arca: SGOL). ETFs like these store bullion in vaults, giving investors direct exposure to spot returns. Under current IRS rules, investments in these precious metals ETFs are considered collectibles. Collectibles never qualify for the 15 percent tax rate applied to traditional equity investments; instead, long-term gains are taxed at a maximum rate of 28 percent. If shares are held for one year or less, gains are taxed as ordinary income (maximum 35 percent). A Better Way? If you’re looking for tax efficiency without the ETN credit risk, there may be hope. ETF Securities recently filed paperwork with the Securities and Exchange Commission for a suite of collateralized swap-based commodity funds. While the filings are light on details, according to the ETFS Collateralized Commodities Trust S-1 filing from May 27, 2010, the new funds will be structured as limited partnerships and reported on K-1s. That means investors will still have extra paperwork. But according to the filing, the funds are expected to be treated as prepaid forward contracts and qualify for the long-term capital gains rate of 15 percent if shares are held for over a year. This would make the taxation of these funds similar to commodity ETNs and benefit long-term Figure 1 Tax Rates By ETF Structure investors who are wary of ETNs due to their credit risks. While counterparty risk is also a concern for investors, according to the filing, it looks like these funds will be fully collateralized. Making The Right Choice Finding the right ETF requires evaluating plenty of factors, of which taxes are only a part. But knowing the tax implications of different choices can make a difference, especially with commodity and currency funds. From a tax perspective, the time period that you expect to own a fund matters. For short-term holders in high tax brackets, for example, LPs offer a strong tax benefit, since 60 percent of any gains are taxed at the low 15 percent tax rate, regardless of holding period. On the flip side, long-term investors might gain an advantage with ETNs because they are subject to 15 percent long-term gains, compared with the 60/40 blend of partnerships, which comes out to a blended maximum of 23 percent. The Catch-22 is that ETNs come with credit risk. Then there are tax reporting differences. The tax structure associated with LPs can be challenging for investors who are accustomed to 1099s when they receive K-1s in the mail. For investors looking to simplify their taxes without K-1s, grantor trusts and ETNs might look more appealing. Disclaimer: We are not professional tax advisors. This article and table is for informational purposes only and not intended to be tax advice. Individuals should always consult with a professional tax advisor regarding fund taxation. STRucTuRe LoNG-TeRm ShoRT-TeRm Open End (40 Act) N/A N/A UIT (40 Act) N/A N/A Grantor Trust (33 Act) 28% 35% *Limited Partnership (33 Act) **23% **23% ETN (33 Act) 15% 35% *Distributes K-1 **Max rate of blended 60 LT/40 ST 10 ETFR • December 2011
Why I Own: EIDO iShares MSCI Indonesia Investable Market Name: Blair Shein Title: Vice President firm: Compass Financial Group Inc. founded: 1961 Location: Deerfield Beach, Fla Aum: $200 million All eTfs? No ETFR: Today you wanted to talk about single-country Indonesian funds? Shein: Right. When we began purchasing Indonesia ETFs, we did so through the Market Vectors Indonesia Index ETF (NYSE Arca: IDX), because that was the only one available at the time. We’ve added the iShares MSCI Indonesia Investable Market Index Fund (NYSE Arca: EIDO), because we like the fact that it has a little higher allocation to the consumer discretionary sector. We saw it as a way to add to our Indonesia exposure with an investment that didn’t have the same tax basis. ETFR: When did you first buy IDX? Shein: We started buying Indonesia in 2009. Since that time, it’s appreciated by about 50 percent. When we wanted to add exposure during 2011, we asked, “What difference is there between IDX and EIDO?” One of the reasons we like Indonesia is because of the consumers and the growth that we see there. And EIDO has a slightly higher allocation to the consumer discretionary sector. It also has about twice the number of holdings as IDX. ETFR: What made you decide to look at Indonesia? Shein: One of the main reasons is that its economy is heavily consumer-driven. About 60 percent of its GDP is related to domestic consumption. And, with the country’s current demographics, the potential for additional growth there is significant. It’s not heavily driven by exports, and it appears to have a growing local demand. From the financial stability standpoint, it has exercised some fiscal constraint, unlike many of the other countries out there. Its debt-to-GDP ratio is roughly 25 percent, which is well below that of the U.S. and many other developed countries. ETFR: How does this compare with other countries? Shein: Japan is probably the most startling comparison. Japan’s debt-to-GDP ratio is close to 200 percent, while China’s is about 20 percent. Japan is near the top of the country debt ratio list. Some of the others— Italy, Greece—are high up there, too. ETFR: Is EIDO’s sector breakdown appealing to you because it has a 15 percent allocation to consumer discretionary? Shein: Yes, compared to 11 percent for IDX. And when we purchased EIDO earlier this year, it was actually at 18 percent. ETFR: When you’re evaluating products, do you evaluate each specific holding? Shein: No, not every single security. We will look at some of the individual positions to see if there is a specific company that we want to have exposure to. But really, when we make our decision, we’re looking more at the demographics of the country as a whole. ETFR: Are you looking at these positions from a long-term perspective? Shein: For the most part, yes. That being said, investors should be aware that iShares mSci indonesia investable market Equity: Indonesia - Total Market issuer: BlackRock Legal Structure: 1940s Act expense Ratio: 0.61% Aum: $300 billion ADV (30-Day): 266,120 Avg. Spread: 0.17% competing funds: IDX Data as of: 11/09/11 Source: Bloomberg there are risks. The country still has considerable improvements that need to be made when it comes to infrastructure, the efficiency and productivity of their workforce, and managing their inflation. It also has a lot of corruption. There have been inflationary concerns in Indonesia. In January, the country’s inflation registered about 7 percent on an annualized basis. That has since slowed down. Through September, Indonesia just reported an annualized rate of 4.6 percent, which is definitely better. It also recently reported annualized GDP numbers of about 6.5 percent, with projections for increases next year. But a couple of the rating agencies—S&P and Fitch—have upgraded the rating on Indonesia earlier this year to one notch below investment grade. ETFR: These two funds are crushing the broader-based emerging markets funds. Is that something you take into consideration? Shein: Our approach is to look for opportunities wherever they are in the world. And while we’ll often hold the broad-based exposure, we’re not restricted by a benchmark target that constrains us from implementing what we feel are our best ideas. We would rather invest in something that we feel has future opportunity. We feel that Indonesia does have that future opportunity. November 9, 2010 – November 9, 2011 N D J F M A M J J A 2010 2011 S O N D -0.26% ETFR • December 2011 11
Page 1 and 2: UPDATES www.indexuniverse.com/ETFR
Page 3 and 4: UPDATES IndexUniverse LLC. 353 Sacr
Page 6 and 7: Commonfund’s Gaspar: Why You Shou
Page 8 and 9: Figure 1 10 Commodity ETFs To Watch
Page 12 and 13: InsideIndexing inaugural conference
Page 14 and 15: December 2011 U.S.-Listed ETFs Sort
Page 24: What’s really in your ETF index?

US-Listed ETFs Sorted by Asset Class and Year-to-Date Return

Create successful ePaper yourself

Delete template?

Save as template?