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ETFs 112: What to Know about Exchange-Traded Notes

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1.
When it comes to earning money on them, exchange-traded notes promise investors _______.
Choose wisely. There is only one correct answer.
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.
2.
Investors can protect themselves from the credit risk of owning an exchange-traded note by using stop-loss orders.
Choose wisely. There is only one correct answer.
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.
3.
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.
4.
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.
5.
Distributions from exchange-traded notes are taxed at _______.
Choose wisely. There is only one correct answer.
Ordinary income rates. Distributions, though rare, are taxed at ordinary income rates.