It's premature to predict outcome on ETN debate

Jan 7, 2008 @ 12:01 am

The InvestmentNews story, "ICI is likely to prevail in its efforts to end ETNs' tax break," (Dec. 3) misses the mark.

First, it is premature to forecast this debate's outcome. There is no supporting legislation or any other step taken by Congress toward changing taxation on exchange traded notes, nor should there be.

Mutual funds and ETNs are different products with different characteristics. Taxing ETNs, as the Washington-based Investment Company Institute proposes, would violate a fundamental principle of taxation, which holds that individuals should be taxed on income actually received, not on phantom income.

Investors who purchase shares of a mutual fund own a share of the fund and actually receive dividend income generated by the underlying securities. At the discretion of investors, this income can be taken in the form of cash or can be reinvested by purchasing more shares of the mutual fund. (InvestmentNews.com, Dec. 6).

Regardless of their choice, investors pay tax on the dividends because they have actually received the income.

ETNs, on the other hand, don't involve the ownership of securities or the distribution of dividend income. Rather, ETNs are contracts between investors and the issuing companies — investors give the issuers cash, and, in exchange, the issuers promise to pay investors an undetermined amount at a later date.

Investors receive income from an ETN only by allowing it to mature or by selling it on the exchange, at which point tax is imposed on the income realized by investors.

Taxing ETNs' phantom income for the sake of mutual funds' competitive advantage is wrong. Investors should only be taxed on income that is actually received.

Anything beyond that would stifle innovation at the expense of investors.

Marc Lackritz

President and chief executive

Securities Industry and Financial

Markets Association

New York and Washington

Zero Alpha study offers no reason to go fee-based

I just read the study by Washington-based Zero Alpha Group concerning market timing and load — versus no-load — mutual funds (InvestmentNews.com, Dec. 6).

If brokers are using this study as a reason to go fee-based rather than commission-based, they are taking a great deal of liberty with this study.

First, the study only applies to market timing and the yield differentials between a broker buying and selling a mutual fund or holding it. It is much more likely that a fee-based broker will try to time the market with mutual funds because a commission broker needs to take into consideration the ethical issue of charging a whole new load.

Second, fee-based brokers are touting the value of being able to use no-load funds in their portfolios but aren't adding in the 1% or more that they charge annually on the value of the fund. When a 1% fee is added annually to a no-load fund, it takes on the characteristics of a C-load fund, which was found to be the worst or second-worst performer in every category.

If this study shows anything, it is that if you want professional advice on mutual funds, it is best to find a commission-based broker who practices the philosophy of buy and hold.

Donald A. Johnson

Registered representative

Brecek & Young Advisors Inc.

Wadena, Minn.

0
Comments

What do you think?

View comments

Recommended for you

Latest news & opinion

The appeal and pitfalls of holding unconventional assets in retirement accounts

While non-traditional asset classes held in individual retirement accounts may have return and portfolio diversification benefits, there are "unique complexities" that limit their value for most investors.

Wells Fargo's move to boost signing bonuses could give it a lift

Wirehouse is seen as trying to shore up adviser ranks that took a hit after banking scandal

New Jersey fines David Lerner Associates for nontraded REIT sales

Firm will pay $650,000 for suitability, compliance and books and records violations.

Report predicts $400 trillion retirement savings gap by 2050

Shortfall driven by longer life spans and disappointing investment returns.

Wells Fargo will ramp up spending to lure brokers

Wirehouse, after losing 400 brokers in first quarter, is bucking trend among rivals who have said they are going to cut back on spending big bucks recruiting veteran advisers

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print