My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.


By Topics

Overall:
0. About (10)
1. My Progress (139)
2. Car & Home (107)
3. Credit (138)
4. Banking (33)
5. Saving (49)
6. Investing (308)
7. Taxes (89)
8. Spending (74)
9. Misc (97)
A. Archive (49)



MONTHLY ARCHIVE

Feb 2014 (3)
Jan 2014 (6)
Jan 2012 (1)
Apr 2011 (1)
Mar 2011 (1)
Feb 2011 (1)
Jan 2011 (1)
Dec 2010 (1)
Oct 2010 (1)
Sep 2010 (1)
Aug 2010 (1)
Jul 2010 (1)
Jun 2010 (1)
May 2010 (1)
Apr 2010 (1)
Mar 2010 (6)
Feb 2010 (2)
Jan 2010 (7)
Dec 2009 (3)
Feb 2009 (4)
Jan 2009 (8)
Dec 2008 (1)
Jun 2008 (2)
May 2008 (2)
Apr 2008 (5)
Feb 2008 (3)
Jan 2008 (15)
Dec 2007 (32)
Nov 2007 (6)
Oct 2007 (8)
Sep 2007 (9)
Aug 2007 (24)
Jul 2007 (2)
Jun 2007 (1)
May 2007 (3)
Apr 2007 (4)
Mar 2007 (4)
Feb 2007 (13)
Jan 2007 (6)
Dec 2006 (3)
Nov 2006 (7)
Oct 2006 (7)
Sep 2006 (6)
Aug 2006 (4)
Jul 2006 (10)
Jun 2006 (1)
May 2006 (3)
Apr 2006 (2)
Mar 2006 (6)
Feb 2006 (6)
Jan 2006 (3)
Dec 2005 (1)
Nov 2005 (9)
Oct 2005 (8)
Sep 2005 (13)
Aug 2005 (25)
Jul 2005 (16)
Jun 2005 (17)
May 2005 (19)
Apr 2005 (20)
Mar 2005 (24)
Feb 2005 (23)
Jan 2005 (36)
Dec 2004 (40)
Nov 2004 (34)
Oct 2004 (17)
Sep 2004 (21)
Aug 2004 (59)
Jul 2004 (37)
Jun 2004 (31)
May 2004 (29)
Apr 2004 (52)
Mar 2004 (49)
Feb 2004 (49)
Jan 2004 (31)
Dec 2003 (48)
Nov 2003 (52)
Oct 2003 (29)
Sep 2003 (8)
Aug 2003 (5)
Jul 2003 (2)
Jun 2003 (2)
May 2003 (5)
Apr 2003 (2)
Mar 2003 (2)
Feb 2003 (3)
Jan 2003 (29)



 

Exchange Traded Notes: A Potential Rule-Breaker?

Contributed by mm | November 12, 2007 10:05 PM PST

ipath.jpg

Both SmartMoney and Kiplinger's Personal Finance recently shed light on a completely new genre of investment vehicle available to the general investors: Exchange-Traded Notes (ETN).

iPath ETN, created and marketed by Barclays Bank, PLC, is very similar to ETF, or Exchange-Traded Funds (also pioneered by Barclays), which can be traded like a stock throughout the day, but also mimics the returns of a benchmark index. However, ETN comes with an important tax advantage over ETFs and mutual funds -- it is not required to distribute dividends and capital gains every year, making it possible for investors to avoid paying tax on such distributions, and having more money at work until the final redemption.

Now here is the caveat: in order to achieve these tax benefits, ETNs are structured as unsecured, unsubordinated debt securities issued by Barclays Bank PLC, with returns linked to a pre-defined benchmark index, minus fees. In other words, the value ETNs are secured by the credibility of Barclays instead of a pool of underlying investments.

Kiplinger's article summarized the two potential lowlights of our new vehicle:

What's the downside of ETNs? The Internal Revenue Service has not weighed in on the proposed tax treatment, so some uncertainty remains. In addition, ETN investors could suffer if Barclays's ability to repay the bonds ever came into question. That's unlikely -- Barclays is one of the world's biggest financial institutions -- but you can't dismiss the prospect entirely.

I'm not going to discount Barclays' credit risk, but let's all admit it is quite small. On the tax front, Barclays has received external counsel opinion from Sullivan & Cromwell LLP that concluded the favorable tax treatment of ETNs. Although not yet confirmed by IRS, Barclays mentioned that similarly structured products in the past issued by other companies have provided similar tax disclosure.

If its preferred tax status is confirmed (which is still an open question), ETNs can be really earth-shattering. The key is without the annual taxing on regular distributions to prevent the compounding to work on its full throttle, investors will always be better off investing in ETNs than in other index funds targetting the same benchmark.

Unfortunately, Barclays' ETN line-up currently only covers a number of commodity and currency indices, the India index and a nice covered-call strategy. If Barclays can expand its ETN offerings to major indices, many wonderful things can happen to shrewd retirement investors.

More PFBlog Articles You Might Find Interesting ...


This Post Has Received 2 Comments. Share Your Opinions Too.


juan22 Commented on November 13, 2007

Very interesting article. I really did not know that much about ETN's before.


StockGuy Commented on November 22, 2007

Actually I don't think this is a very good solution. The only investors interested in a tax deferred products are those who are in high tax brackets. Why would a high income individual want to trade Dividend Tax (15%)for a deferred Income Tax (35%)?



Read More ... 308 Posts In The Same Category










This page was last rebuilt at January 27, 2014 07:34 AM PST.
 

RSS FEED





PERSONAL FINANCE BLOGS I READ

Consumerism Commentary
Get Rich Slowly
My Money Blog
All Financial Matters
The Simple Dollar






.

Error 500 - Internal server error

Error 500 - Internal server error

An internal server error has occured!
Please try again later.



Copyright 2003-2014, PFBlog.com. All Rights Reserved. (Privacy Policy)