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1.
What is the main tax advantage of exchange-traded notes over exchange-traded funds?
Taxes are charged only on capital gains when the ETN is sold. ETNs are not tax-free, but they can be used to defer taxes as typically dividend or interest income is applied as an increase in the principal, so investors only have to pay taxes upon sale. At that time, the typically lower capital gains rate will be applied, not the ordinary income rate, and if the ETN was held for longer than a year, the lower long-term rate will be applied. The exception is with currency ETNs, which are taxed like other currency investments including ETFs.
2.
Exchange-traded notes are similar to traditional exchange-traded funds. Therefore, they are funds.
False. They are essentially bonds, not funds. They do not hold a fundful of securities.
3.
Distributions from exchange-traded notes are taxed at _______.
Ordinary income rates. Distributions, though rare, are taxed at ordinary income rates.
4.
A sizable premium or discount on an exchange-traded note could be a red flag. Why?
Either of the above. Either of these situations could lead to big premiums or discounts on an exchange-traded note.
5.
Investors can protect themselves from the credit risk of owning an exchange-traded note by using stop-loss orders.
False. Using a stop-loss order would address market risk, not credit risk. To address credit risk, investors should monitor the financial situation of the issuing bank.
