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ETFs 112: What to Know about Exchange-Traded Notes

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1.
Distributions from exchange-traded notes are taxed at _______.
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Ordinary income rates. Distributions, though rare, are taxed at ordinary income rates.
2.
How can investors protect themselves from the credit risk inherent in owning an exchange-traded note?
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By monitoring the financial situation of the issuing bank, and selling out if warning signs appear. The other three options are ways to mitigate the market risk of the investment, not the credit risk.
3.
A large premium on an existing exchange-traded note might do what if new shares of the note are issued?
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Fall. Large premiums can quickly collapse upon the issuance of new shares of an exchange-traded note.
4.
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.
5.
What is not a tax difference between currency exchange-traded notes and all other exchange-traded notes?
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Currency ETNs have foreign withholding tax. Foreign withholding tax is based upon the jurisdiction of the ETN, not the jurisdiction of the underlying index. Currency ETNs have the same tax status as other currency investments, so capital gains and income are charged at ordinary income tax rates, and are ineligible for the lower rate for long-term capital gains on investments held for more than one year. Also, even though they do not distribute interest income to investors, the holders are still responsible for the tax on the accrued interest income (and capital gains) when they file their taxes.
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