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ETFs 112: What to Know about Exchange-Traded Notes

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1.
What is the main tax advantage of exchange-traded notes over exchange-traded funds?
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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.
When it comes to earning money on them, exchange-traded notes promise investors _______.
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The return on a given index minus fees. ETNs follow a given index and promise returns based on that. They do not guarantee that return, however.
3.
A sizable premium or discount on an exchange-traded note could be a red flag. Why?
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Either of the above. Either of these situations could lead to big premiums or discounts on an exchange-traded note.
4.
An investor in exchange-traded notes can look forward to the kinds of regulatory protections that exchange-traded funds and open-end mutual funds enjoy.
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False. ETNs are not governed under the same regulatory structure as those other investments.
5.
Exchange-traded notes are similar to traditional exchange-traded funds. Therefore, they are funds.
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False. They are essentially bonds, not funds. They do not hold a fundful of securities.