Mildly interesting FAQ on exchange traded notes in the WSJ. They are different than ETFs and carry some baggage. I am long the meat ETN. The two big issues for ETNs is credit risk and taxable issues. Concerning tax issues this article does not make it sound as bound as I have understood it to be. Still totally unclear to me though I think they main tax problems are with currency ETN's.
A: An ETN, by contrast, is unsecured debt of the issuing firm, usually with a maturity of 10, 20 or 30 years. It isn't backed by a specific pool of assets.
For investors, the difference essentially means that, if an ETF were to be liquidated, investors would get their share of the stored assets. ETN investors, however, would stand in line with other creditors of the firm, getting their money back only if there were funds left over after the secured creditors were paid.
As Bear Stearns Cos. was struggling in mid-March amid rumors of a possible bankruptcy-court filing, some holders of its BearLinx Alerian MLP Select Index ETN sweated bullets. The ETN -- which tracks the 50 most prominent energy master limited partnerships -- traded, but volume was thin. Teetering as its stock price plunged, Bear Stearns agreed to be acquired by J.P. Morgan Chase & Co. The deal was completed May 30. J.P. Morgan says it is hopeful that interest in the ETN will improve.
Q: What is the tax treatment of ETNs?
A: As Barclays explains on its iPath Web site, ETNs generally should be treated as "prepaid contracts" for tax purposes. That means investors should recognize capital gains or losses upon the sale, redemption or maturity of their ETNs, although certain types, such as single-currency ETNs, are taxed as ordinary income. "Unlike mutual funds that may be required to make taxable distributions to shareholders, the iPath ETNs currently available will not make taxable distributions," it says. "This enables investors to control the timing of taxable events related to their investment in iPath ETNs." Barclays adds that the Internal Revenue Service and U.S. Treasury are actively considering the tax treatment of instruments such as iPath ETNs, so it could change.