Asset Management
Exchange-traded product overview
Introduction
While most investors are familiar with exchange-traded funds (ETFs), they may not realize that there are several types of exchange-traded products1 (ETPs), each with unique structures and implications. By comparing these features, investors can gain a better understanding of each product’s role in their portfolio.
By understanding the various ETP structures and their unique features, investors can choose the product structure that best suits their objectives.
| Product structure | |||||
|---|---|---|---|---|---|
| Feature | Open-end fund | Unit investment trust | Grantor trust | Limited partnership | Exchange-traded note (ETN) |
| Registration | Investment Company Act of 1940 | Investment Company Act of 1940 | Securities Act of 1933 | Securities Act of 1933 | Securities Act of 1933 |
| Portfolio composition | Portfolio of securities | Portfolio of securities | Pro rata interest in the underlying assets held by the trust | Pro rata interest in the partnership—typically holding futures contracts | Senior, unsecured, unsubordinated debt, issued by banks |
| Creation/redemption | Daily, combining securities, cash, cash in lieu of securities | Daily, combining securities, cash, cash in lieu of securities | Daily, combining physical asset(s) and cash | Daily, using cash | Redemptions typically allowed on a daily or weekly basis |
| Specific termination date | No | Yes | Yes | No | Yes |
| Replication/optimization/other | May replicate or optimize index | Must fully replicate index | Varies | Not applicable | Varies |
| Fund portfolio dividend reinvestment | Yes | No | No | Varies | Not applicable |
| Tax implications | Potential exposure to capital gains and losses. At the portfolio level, dividend and interest income must be passed through to shareholders or reinvested in fund. | Potential exposure to capital gains and losses. At the portfolio level, dividend and interest income must be passed through to shareholders or reinvested in fund. | Taxed as if investor effectively holds underlying securities. Each investor takes a pro rata share of the trust’s income and expenses. | Generally, hybrid rate is used for futures contracts (see below) regardless of holding period. | Varies: There are no dividend distributions; proceeds may be treated as capital gains or ordinary income upon the sale, redemption, or maturity of the ETN. |
| Tax: Capital gain/loss (upon sales in taxable accounts) | Short-term if held 1 year or less; long-term if held more than 1 year | Short-term if held 1 year or less; long-term if held more than 1 year | Short-term if held 1 year or less; 28% maximum rate applies for long-term | Hybrid rate of 60% long-term and 40% short-term (or ordinary income) | Short-term if held 1 year or less; long-term if held more than 1 year |
| Tax treatment for distributions (taxable, non-retirement accounts) | Taxed as if investor owned the underlying security | Taxed as if investor owned the underlying security | N/A | May have reportable interest income and capital gains even if not distributed | N/A |
| Tax form | 1099 | 1099 | Sponsor may issue a letter or statement of tax liabilities. | K-1 | 1099 |
This is not an all inclusive list of the differences between the products. This is being presented for illustrative purposes only.
Summary
Today, most ETPs are structured as open-end funds or unit investment trusts designed to track domestic equity, international equity, and fixed income indexes. Comparing the various ETP structures and their associated features can impact an investor’s selection criteria, including taxation, diversification, liquidity, risk, and total return.
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